Equal-weighted exchange-traded equity funds have attracted notable amounts of investor money in the past 12 months as investors move away from ETFs that track standard market indices which typically assign large weights to equities with the largest market worth at the expense of smaller, but still worthwhile, stocks. Daniel Dornel explains.
The shift reflects investor concerns that market capitalisation weighted indices have come to be comprised of fewer and fewer stocks as a handful of corporate giants attain billion-dollar market valuations.
These mega-cap stocks have risen to dominate major market indices such as the US S&P500 or the MSCI World index on the back of significant share price gains.
High levels of concentration in an index obviously entail a considerable risk, for example, in the case of a price correction for just one or two of these mega caps, also known as the Magificent-7.
Investors have come to realise that an equal-weighted investment approach can offer portfolio diversification from the Magnificent 7 and as well as US equities generally.
Below we take a closer look at the MSCI World index and ask whether it can actually be seen as a ‘world index’.
