TimingCube - Equal-weighted index ETFs - equal-weighted indices,index ETFs,growth stock,capitalization-weighted,concentrated portfolio,cap-weighted

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Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQQ

Note: QQQQ returns are included for continuity sake.

Market Update

Markets continued to pull back from their early August highs in a week that was marked by low trading volume. Stocks took their biggest hit on Tuesday, after Wal-Mart posted its smallest quarterly profit gain in years and lowered its guidance for Q3, citing the impact of high gas prices on its customers. Several other retailers followed suit and guided views lower for this quarter, also saying that the rising cost of gasoline is hurting sales. The July CPI (Consumer Price Index) number was released Tuesday and came in at 0.5%. Excluding volatile food and energy prices, the core CPI barely edged higher as it only rose 0.1%.

For the week, both the Nasdaq 100 and Russell 2000 lost 1.13%. For its part, the S&P 500 posted a 0.87% loss. The Nasdaq 100 and S&P 500 remain above both their respective 50-day and 200-day exponential moving averages (EMAs). As for the Russell 2000, it closed the week just below its 50-day EMA and is still well above its 200-day EMA. Our active Buy signal remains in effect.

Trend Timing School

Equal-weighted index ETFs

In the late 1990s, when mega-large companies were all the rage, everyone loved the S&P 500 performance and its high concentration of super large growth stocks; but in recent years, performance has been lagging. Some say they have found the cause of the problem as being "capitalization-weighted indices", and the cure, in what they call "equal-weighted indices" and ETFs.

But, first things first. Most popular indices, like the S&P 500, Nasdaq 100 and
Russell 2000, are so-called capitalization-weighted, which means that the companies constituting the index are represented as a function of their respective size, the largest weighing the most. To illustrate how top-heavy these indices really are, the top 10 companies in the S&P 500 represent over 22% of the index.

It turns out that the top-heavy nature of most indices, and in turn of the ETFs that track them, can become a liability during periods when investors are more enthusiastic about the growth prospects of smaller companies, as has been the case in recent years. Recognizing that fact Rydex, in cooperation with Standard and Poor's, have developed an equal-weighted index and related ETF.

The little known index is called the S&P Equal Weight Index and the mirroring Rydex ETF is called S&P Equal Weight ETF. The underlying stocks are identical to those in the traditional S&P 500 index. Instead of the cap-weighted approach, these allocate 0.2% of their assets to each of the index's 500 stocks, which automatically gives more weight to smaller companies, because there are more of them. The smallest company in the 500 has a weight equal to that of the largest. In contrast to the S&P 500's highly concentrated portfolio, the equal-weighted index's top 10 holdings account for just 2% of the portfolio.

So, what would be the advantage of such a fund, you may ask? In the words of one of our subscribers "you are less beholden to the performance of a small cluster of very large-cap companies". Which has been great lately because smaller companies have outperformed the larger ones.

As can be seen in Graph 1 below, over the last couple of years, RSP has soundly outperformed its cap-weighted competition, be it the S&P 500 index itself, or SPY (S&P Depository Receipt or "Spiders"), the oldest ETF, and largest one tracking the S&P 500.

Graph 1: RSP versus competition

As always when dealing with the stock market, there is more than one side to every story. We generally do not make predictions but we can safely postulate that RSP will be soundly defeated by SPY sometime in the future. We just don't know when. Table 1 below also sheds some light on the actual differences between the two types of funds. RSP being "younger" than SPY by just about 10 years, its liquidity may sometimes be an issue, especially when trying to sell short. Also, some feel that the RSP expense ratio is excessive, almost four times higher than that of its counterparts.

Table 1: S&P 500 tracking funds, cap-weighted versus equal-weight

ETF ticker	SPY	IVV	RSP
ETF name	S&P Depositary Receipts (SPDRs)	Trust iShares S&P 500 Index Fund	Rydex S&P Equal Weight Index Fund
Style	Cap-weighted	Cap-weighted	Equal-weighted
YTD return, as of 7/31/05	3.19%	3.20%	5.40%
Total expense ratio	0.11%	0.09%	0.40%
Net assets	$50B	$13B	$1B
Volume, daily	52M	680K	82K
Began trading	Jan 93	May 00	Apr 03

There is a good chance that the equal-weighted index ETF craze will last for a while. There is even talk of equal-weighted funds focusing on other indices such as the Nasdaq 100 and the Nasdaq Composite. We will be on the lookout for such offerings and might update our "What to trade?" section accordingly from time to time.

But in the end, if what you really seek is the higher performance (currently) of smaller stocks, maybe you should seriously look at the Russell 2000 index, and its tradable shadow ETF, IWM. They have been leading the parade for the last couple of years.