≈
Here’s why I like market-cap-weighted indexes
≈
Traders,
Did you know that not all market indexes are created equal? There are three standard methodologies for creating an index: market-cap-weighted, price-weighted, and equal-weighted.
The S&P 500 and Nasdaq Composite are market cap-weighted. The Dow Jones Industrial Average is price-weighted. You’re probably not familiar with any of the equal weight Indexes or ETFs, but here’s one: the Invesco S&P 500 Equal Weight ETF (RSP).
Market-cap-weighted (or “cap-weighted” for short) indexes put the most weight on the largest companies. The logic is intuitive and goes something like this: The largest companies on the planet are the most representative of the economy. The profits of Walmart, Amazon, Apple, Google, Visa, Berkshire Hathaway, Johnson & Johnson, and other giants are more representative of the economy’s health than the earnings of much smaller companies.
Their size and disproportionate impact bring more stability to the Index and arguably less risk. By placing more weight on the largest companies, the S&P 500 effectively “rewards” companies that thrive by punishing those that don’t. In that sense, the Index automatically adds to winners while reducing exposure to losers.
In a world where some 44% of all companies end up suffering catastrophic losses (see yesterday’s Tackle Today blog), it seems to me that crafting an index that continually focuses on upping exposure to the winners while weeding out the losers is smart.
#TeamTackle
Chart of the Day
Top Ten Holdings of S&P 500
The top ten holdings of the S&P 500 changes as stock prices fluctuate, but one of the crazier developments in recent memory was Tesla being added after its market cap had grown beyond 495 of the 500 stocks already in the Index.
Video of the day
The Queen’s Court
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
Traders Lounge at Night 8:30 PM EST
Join Greg Holmes tonight as he hosts our weekly nightly Trader’s Lounge
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Trade Masters 7:00 pm EST
Join us for a special webinar with the coaches where they’ll analyze some trade setups.
Financial freedom is a journey
The Tackle Today series is brought to you by Tackle Trading.
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
# Sign up now for a 15-DAY FREE TRIAL #
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
