Equal weight indices are in vogue. It’s essential to have seen recent index fund launches from varied AMCs.
On this publish, allow us to have a look at a few of the good and not-so-good factors about equal weight indices. We’ll see how equal weight indices have carried out over the past 2 a long time in comparison with the market-cap primarily based indices.
Sharing in short initially. Will talk about the nuances later.
Cap-Based mostly Indices Vs Equal Weighted Indices
In a market cap-based index (Nifty 50, Sensex, Nifty Subsequent 50, Nifty Midcap 150), a inventory with a better free-float market cap will get a better weightage within the index.
In an equal weight index, all of the shares have the identical weightage. Sure, the weights could change primarily based on the efficiency of constituent shares however are rebalanced to the identical weight on the rebalancing date.
As an example, Nifty 50 Equal Weight index, weights of all of the shares within the index will likely be rebalanced to 2% on the date of rebalance. The index is rebalanced semi-annually on the final working day of March and September.
With a market-cap primarily based index, the weightage of a inventory will enhance (lower) with good (unhealthy) efficiency of the inventory. The allocation to rising shares will enhance. It will occur in an EW index too, however the portfolio will reset to equal weight on the portfolio rebalancing date.
In an EW index, the cash would transfer from better-performing inventory to an underperforming inventory on the rebalancing date. This makes extra of a “Worth” play. Market-cap primarily based indices let the shares experience the “momentum”.
#1 Diversification
With a market-cap primarily based index, outperformance in a single or few high shares can supercharge the index returns. Equally, the under-performance of some high shares could make all the index undergo. This is not going to occur in an equal weighted index.
Equal weight indices are prone to be extra diversified, as a single inventory (or just a few shares) will be unable to hijack all the index. EW indices are prone to have a greater diversified trade publicity.
Think about trade and constituent-wise break up for Nifty 50.
Supply: Factsheets for respective indices on NiftyIndices.com. Knowledge as on July 31, 2024
Now for Nifty 50-Equal Weight.
Within the cap-based Nifty 50 Index, the weightage of high shares is sort of excessive.
In Nifty 50 Equal weight, the weightage of inventory is near 2%. Will get again to actual 2% on the rebalancing date.
Therefore, on the diversification entrance, equal weight indices appear to attain over cap-based indices.
#2 Liquidity
When a inventory’s free-float market cap is larger, it’s cheap to besides that the inventory may also be liquid i.e., you might be able to purchase and promote the inventory at a low influence price. Bid and ask costs could also be nearer. The liquidity in a inventory is necessary as a result of the fund supervisor wants to purchase and promote inventory to handle purchases and redemptions.
Whereas in a cap-based index, the fund supervisor should purchase in proportion of their market cap. As an example, if a fund supervisor should deploy Rs 10 crores in a Nifty index fund, he/she should make investments say about 1.1 crore every in HDFC Financial institution, 94 lacs in Reliance Industries and so forth. These quantities are primarily based on weights as on July 31, 2024.
Nevertheless, in an equal-weight index, the fund supervisor should purchase all of the shares for a similar quantity. 20 lacs in every of the shares in Nifty 50.
Now, this liquidity is probably not an issue for Nifty 50 Equal Weight. However there are different equal weight indices as nicely.
Think about Nifty 500 Equal Weighted index.
Would the inventory which ranks between 450 and 500 when it comes to market cap have the identical liquidity and volumes as Reliance Industries, HDFC Financial institution, or Infosys? However the fund supervisor should purchase/promote all these shares for a similar quantity. It’s an equal-weighted index. Would that enhance monitoring distinction?
Market cap-based indices handle these points by design. The allocation is dependent upon the free float market cap. A much bigger inventory will get a better allocation. And a small inventory will get a decrease allocation. No such luxurious in equal weight indices.
Therefore, in case you are taken with an equal weighted index, do keep watch over the monitoring distinction.
#3 Publicity
What does a Nifty 500 index fund provide you with publicity too?
Provides you publicity to virtually all the market spectrum. Massive cap, midcap, and small cap. Right here is the classification of shares as per SEBI definition.
Massive cap: 1-100th inventory by market cap
Midcap;101st-250th inventory by market cap
Small cap: 251st-500th inventory by market cap
What doesn’t a Nifty 500 Equal Weight index provide you with publicity to?
To the identical set of shares. High 500 shares.
Whereas the shares are the identical, the allocation to the massive, midcap, and small cap indices is drastically completely different.
Nifty 500: Massive cap: ~72%, Midcap: ~17%, Small cap: ~10%
Nifty 500 Equal Weight: Massive cap: 20%, Midcap: 30%, Small cap: 50%
Knowledge as on July 31, 2024. Supply: Nippon AMC presentation
Disclaimer: The securities proven above aren’t recommendatory.
Nifty 500 appears extra like a big cap or a multicap fund.
Nifty 500 Equal Weight is extra like a mid and small cap fund.
I’m not implying that the Nifty 500 index is healthier than Nifty 500 Equal Weight index or vice versa. Merely saying that these are 2 massively completely different funds and provide you with vastly completely different inventory market publicity.
No matter how indices have carried out up to now, there will likely be instances sooner or later when Nifty 500 will outperform. And there will likely be instances when Nifty 500-EW will outperform Nifty 500. When there’s a broader market rally and mid and small cap shares are outperforming, you possibly can anticipate Nifty 500-EW to carry out higher.
When the massive caps are outperforming, Nifty 500 will possible beat Nifty 500-EW.
And earlier than you put money into any product, you have to understand how your cash have to be invested.
How have Equal Weight Indices fared?
All this data is ok, however how these EW indices have fared in comparison with fashionable market-cap primarily based indices.
I’ve picked up distinguished equal weight and market cap-based indices for the comparability.
- Nifty 50
- Nifty 50 Equal Weight
- Nifty 100
- Nifty 100 Equal Weight
- Nifty Subsequent 50
- Nifty Midcap 150
- Nifty Smallcap 250
- Nifty 500
- Nifty 500 Equal Weight
I’ve used month-end information from April 1, 2005, till August 31, 2024.
I’ve used Value index information (PRI) for comparability. And never Complete Returns index. Please perceive you can not put money into the index fund straight. It’s essential to make investments by means of index funds or ETFs. Therefore, whereas evaluating, you have to keep watch over the expense ratio and the monitoring distinction.
Whereas evaluating any funding on your portfolio, you have to additionally attempt to see when these merchandise have outperformed.
Since we’re talking about equal weight indices, it’s good to see if the outperformance of equal weight indices comes when smaller shares have carried out nicely. It will possible be the case as nicely. As an example, a method to view the efficiency of Nifty 50 and Nifty 50 Equal Weight is to evaluate together with the efficiency of Nifty Subsequent 50 index. I do know this isn’t the right method to consider efficiency. The explanation I picked Nifty Subsequent 50 is as a result of it has shares simply exterior of Nifty 50 and smaller than Nifty 50 shares.
I’ll depart this information to your interpretation.
Nifty 50 vs Nifty 50 Equal Weight
As mentioned above, bringing in Nifty Subsequent 50 for comparability too.
Nifty 100 vs Nifty 100 Equal Weight
Since Nifty 100 index includes of shares in Nifty 50 and Nifty Subsequent 50 index fund, I’ve added these funds for comparability too.
Nifty 500 vs Nifty 500 Equal Weight
Since Nifty 500 Equal weight has 30% midcap and 50% small cap shares, I’ve added these indices too for comparability.
You’ll be able to discover that Nifty 500 Equal Weight outperforms when the midcap and small cap indices have carried out nicely. You’ll be able to examine this from calendar 12 months returns too. Alongside anticipated strains.
Do you have to put money into Equal Weight indices?
There isn’t a black and white reply to this query. Is determined by your choice and the way you wish to use these in your portfolio. As an example, an investor can mix Nifty 500 and Nifty 500 Equal Weight in a particular ratio portfolio to get the specified allocation to massive, midcap, and small cap funds within the portfolio.
In the event you plan to put money into an equal-weight index fund, you have to take into account the next elements.
- Don’t simply go by fancy presentation by AMCs. Perceive sort of publicity the EW index fund presents.
- Think about previous efficiency. Whereas previous efficiency shouldn’t be an indicator of future efficiency, attempt to see if you may get the expertise of EW index fund by mixing 2 cap-based indices. By expertise, I imply each returns and volatility.
- You don’t put money into the index. You put money into index funds and ETFs. Think about expense ratio and monitoring distinction
- Assess if the equal weight index fund provides ample worth to warrant one other fund within the portfolio.
Passive investing is choosing up in India. Therefore, anticipate AMCs to launch new concepts regularly, however you can not make investments in every single place.
Have you ever invested in Equal Weight indices? If sure, which one and why? Do let me know within the feedback part.
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM on no account assure efficiency of the middleman or present any assurance of returns to buyers. Funding in securities market is topic to market dangers. Learn all of the associated paperwork rigorously earlier than investing.
This publish is for schooling goal alone and is NOT funding recommendation. This isn’t a advice to speculate or NOT put money into any product. The securities, devices, or indices quoted are for illustration solely and aren’t recommendatory. My views could also be biased, and I’ll select to not give attention to elements that you just take into account necessary. Your monetary targets could also be completely different. You will have a special danger profile. Chances are you’ll be in a special life stage than I’m in. Therefore, you have to NOT base your funding choices primarily based on my writings. There isn’t a one-size-fits-all answer in investments. What could also be a great funding for sure buyers could NOT be good for others. And vice versa. Due to this fact, learn and perceive the product phrases and circumstances and take into account your danger profile, necessities, and suitability earlier than investing in any funding product or following an funding method.
