Equal weight index outperforms traditional market cap weight index

From
Arian Niron

Arian Neiron

Market Vectors Australia, an exchange traded fund (ETF) business of US-based investment manager Van Eck Global, today announced that research proves an investment portfolio that follows an equal weight index produced stronger long-term returns and better diversification than traditional market-cap weighted indices. 

A white paper by Market Vectors Index Solutions, a German-based index provider, revealed that its Market Vectors Australia Equal Weight Index outperformed the S&P/ASX 200 Index in nine out of the last 12 years.

The research found that a hypothetical $10,000 invested in the Market Vectors Australia Equal Weight Index in January 2003 would have been worth $30,304 after ten years of investment. The same amount invested in the S&P/ASX 200 Index would have been worth $27,910 over the same period.

The white paper also cites a CSIRO-Monash Superannuation Research Cluster research paper published in 2013, which concluded that an equal weight index delivered the best performance over the long-term when compared to fundamental indices and market capitalisation indices in the US. The research found that $1 invested in an equal weight index in 1962 would have grown to $100.86 in 2009.  A $1 investment in a market-cap weighted index would have returned $59.04 for the same period.

Lars Hamich, Chief Executive Officer of Market Vectors Index Solutions, said, “Traditional indices were primarily designed as academic tools or economic indicators and not necessarily to underlie financial products.

“It is crucial that index methodology focuses on key features such as liquidity, diversification and pure-play exposure. These are important characteristics when it comes to the design of indices which are expected to underlie ETFs.

“The Market Vectors Australia Equal Weight Index is characterised by all of the above features. Moreover, its equal weight capping overcomes concentration issues because it removes the heavy bias to a few Australian large-capitalisation companies such as BHP and CBA,” said Mr Hamich.

Market Vectors Australia recently launched its Australian Equal Weight ETF (ASX code: MVW) – the first Australian equity equal weight ETF available to Australian investors. MVW tracks the Market Vectors Australia Equal Weight Index, which currently provides investors with equal exposure across 76 of the most liquid ASX-listed securities.

Arian Neiron, Managing Director, Market Vectors Australia said, “Australia has one of the most concentrated equity markets in the world with the top ten companies making up more than half of the market capitalisation of Australia’s top 200 listed stocks. The Market Vectors Australian Equal Weight ETF provides investors with diversified exposure to the Australian equity market and may form the core investment in a portfolio.

“We believe that MVW is an optimal portfolio construction tool.  It may be used as a starting point for a diversified portfolio.  Around an equal weight core, investors can take sector and stock positions to create an investment mix that reflects the investor’s own investment objectives and future expectations of the market,” he said.

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