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EQUAL WEIGHT

A type of weighting that gives the same weight, as well as the importance to each stock in a portfolio or index fund, and the smallest companies, are given equal weight to the largest companies in an equal-weight index fund or portfolio.

This permits all of the companies to be considered on an even playing field. For example, the Rydex S&P Equal Weight Exchange Traded Fund provides the same exposure to the smallest companies in the S&P 500 as it does to corporate giants such as General Electric and Exxon.

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It differs from the weighting method which is more commonly used by funds as well as portfolios in which stocks are weighted based on their market capitalizations. Equal-weighted index funds have a tendency to have a higher stock turnover than market-cap-weighted index funds. As a result of this, they usually have higher trading costs.

The rating system may be three-tiered and among the three equal weight is mainly used by the financial analyst as well as brokers advising that Technology is of "equal weight" in which case, the recommendation is to hold 10% by value of Technology shares.

As the name implies, this is an equal-weight version of the popular S&P 500 Index although both indexes are comprised of the same stocks. The different weighting schemes give rise to two indexes with different properties and it will provide different benefits for investors there are also exchange-traded funds (ETFs) that track each of the two indexes.

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Alternatively, this strategy can reduce the portfolio's concentration risk as equal amounts are invested in each stock within the index despite their relative market capitalization. This identifies the pool of securities to be included in the portfolio since each security has an equal impact on performance.

This impact of smaller securities is then compared to a traditional market capitalization index which is then accentuated. A 'floor' based on a certain level of market capitalization and/or liquidity is set which ensures that stocks are deemed too small and/or infrequently traded securities. They are excluded from the pool mitigating the higher volatility which is often associated with such stocks.

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