Equal weight indices are in vogue. You could have seen contemporary index fund launches from varied AMCs.
On this put up, allow us to have a look at a number of the good and not-so-good factors about equal weight indices. We are going to see how equal weight indices have carried out during the last 2 many years in comparison with the market-cap based mostly indices.
Sharing briefly in the beginning. 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 might change based mostly 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 probably 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 based mostly index, the weightage of a inventory will enhance (lower) with good (unhealthy) efficiency of the inventory. The allocation to rising shares will enhance. This can 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 based mostly indices let the shares trip the “momentum”.
#1 Diversification
With a market-cap based mostly index, outperformance in a single or few prime shares can supercharge the index returns. Equally, the under-performance of some prime shares could make the whole index undergo. This is not going to occur in an equal weighted index.
Equal weight indices are more likely to be extra diversified, as a single inventory (or just a few shares) won’t be able to hijack the whole index. EW indices are more likely to have a greater diversified business publicity.
Take into account business and constituent-wise break up for Nifty 50.
Supply: Factsheets for respective indices on NiftyIndices.com. Information as on July 31, 2024
Now for Nifty 50-Equal Weight.
Within the cap-based Nifty 50 Index, the weightage of prime shares is kind of excessive.
In Nifty 50 Equal weight, the weightage of inventory is near 2%. Will get again to precise 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 will even 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 based mostly on weights as on July 31, 2024.
Nonetheless, 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 effectively.
Take into account Nifty 500 Equal Weighted index.
Would the inventory which ranks between 450 and 500 by way of 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 maintain these points by design. The allocation is determined by the free float market cap. An even 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 interested by an equal weighted index, do regulate the monitoring distinction.
#3 Publicity
What does a Nifty 500 index fund offer you publicity too?
Offers you publicity to nearly the whole 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 offer you publicity to?
To the identical set of shares. High 500 shares.
Whereas the shares are the identical, the allocation to the big, midcap, and small cap indices is drastically totally different.
Nifty 500: Massive cap: ~72%, Midcap: ~17%, Small cap: ~10%
Nifty 500 Equal Weight: Massive cap: 20%, Midcap: 30%, Small cap: 50%
Information 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 vastly totally different funds and offer you vastly totally different inventory market publicity.
No matter how indices have carried out previously, there will probably be occasions sooner or later when Nifty 500 will outperform. And there will probably be occasions when Nifty 500-EW will outperform Nifty 500. When there’s a broader market rally and mid and small cap shares are outperforming, you may count on Nifty 500-EW to carry out higher.
When the big caps are outperforming, Nifty 500 will doubtless beat Nifty 500-EW.
And earlier than you put money into any product, you will need to know the way your cash should be invested.
How have Equal Weight Indices fared?
All this info is okay, however how these EW indices have fared in comparison with in style market-cap based mostly 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 Worth index information (PRI) for comparability. And never Whole Returns index. Please perceive you can not put money into the index fund immediately. You could make investments by means of index funds or ETFs. Therefore, whereas evaluating, you will need to regulate the expense ratio and the monitoring distinction.
Whereas evaluating any funding on your portfolio, you will need to additionally attempt to see when these merchandise have outperformed.
Since we’re talking about equal weight indices, it’s worthwhile to see if the outperformance of equal weight indices comes when smaller shares have carried out effectively. This can doubtless be the case as effectively. As an example, a approach 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 approach to consider efficiency. The rationale I picked Nifty Subsequent 50 is as a result of it has shares simply outdoors of Nifty 50 and smaller than Nifty 50 shares.
I’ll go away 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 may discover that Nifty 500 Equal Weight outperforms when the midcap and small cap indices have carried out effectively. You may test this from calendar yr returns too. Alongside anticipated strains.
Must you put money into Equal Weight indices?
There isn’t a black and white reply to this query. Relies on your choice and the way you need to use these in your portfolio. As an example, an investor can mix Nifty 500 and Nifty 500 Equal Weight in a selected ratio portfolio to get the specified allocation to giant, midcap, and small cap funds within the portfolio.
Should you plan to put money into an equal-weight index fund, you will need to think about the next elements.
- Don’t simply go by fancy presentation by AMCs. Perceive type of publicity the EW index fund gives.
- Take into account previous efficiency. Whereas previous efficiency just isn’t an indicator of future efficiency, attempt to see if you will 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. Take into account expense ratio and monitoring distinction
- Assess if the equal weight index fund provides adequate worth to warrant one other fund within the portfolio.
Passive investing is choosing up in India. Therefore, count on AMCs to launch new concepts frequently, however you can not make investments in all places.
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 put up is for schooling objective 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 could select to not concentrate on elements that you just think about necessary. Your monetary targets could also be totally different. You could have a special threat profile. Chances are you’ll be in a special life stage than I’m in. Therefore, you will need to NOT base your funding choices based mostly on my writings. There isn’t a one-size-fits-all resolution in investments. What could also be a superb funding for sure buyers might NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and situations and think about your threat profile, necessities, and suitability earlier than investing in any funding product or following an funding strategy.
