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Index IDEA: Concentrating on equal weight

New research by FTSE Russell suggests that when the US large cap equity market as reflected by the Russell 1000® Index becomes more concentrated, indexes that equally weight individual stocks tend to outperform cap weighted benchmarks. And a closer look at the US large cap equity market suggests that value-oriented equal weight indexes may have more room to grow.

Tom Goodwin, Senior Research Director, FTSE Russell Indexes, said:

“We compared the annual return of the Russell 1000 Enhanced Value Equal Weight Index over the Russell 1000 Index to the weight of the largest 10 stocks in the Russell 1000 for every year since 2002 and found a .62 positive correlation. In other words, high concentration has often meant better results for equally weighted indexes compared to broad cap weighted benchmarks.

Source: FTSE Russell. Data from January 2002 to December 31, 2016. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

And a closer look at US large cap equity market concentration going into 2017 shows the 10 largest stocks within the Russell 1000 occupying an increasingly large percentage of the index.

Source: FTSE Russell. Data from January 2016 to June 2017. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

Harison Sidhu, CFA, FRM, Portfolio Manager, Choate Investment Advisors, said:

"We've seen growing concentration in the US large cap equity market over the past few years. Our research suggests that index-based equal weight strategies, which rebalance by trimming positions that have recently outperformed and adding to names that have recently underperformed, tend to outperform cap-weighted strategies as the market becomes more concentrated. A strategy that refines this equal weight approach by filtering out unprofitable companies, highly overvalued names, and stocks that have underperformed the broader industry is particularly compelling in today's market. In essence, it's eliminating the least desirable companies from the universe."

The Russell 1000 Enhanced Value Equal Weight Index has been designed to reflect the performance of securities in the Russell 1000 universe exhibiting upward relative price momentum and fair valuations. All index constituents are equally weighted and the index is rebalanced twice a year.

The index serves as the basis for the PowerShares Russell 1000 Enhanced Equal Weight Portfolio ETF (USEQ) recently introduced by PowerShares. For more information equal weight indexes from FTSE Russell, go to the FTSE Russell website.

 

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Views expressed by Tom Goodwin of FTSE Russell and Harison Sidhu of Choate Investment Advisors are as of July 26th and subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the LSE Group.

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No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this IDEA should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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