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By DailyAlts Staff S&P Dow Jones Indices divides the U.S. stock market into ten sectors: Consumer-discretionary, consumer-staples, energy, financials, health care, industrials, materials, technology, telecommunications, and utilities. Real estate investment trusts (“REITs”) and other real estate-related stocks are currently included within the financial sector, but that will change next year , when S&P Dow Jones will break real estate out into an eleventh sub-sector of the S&P 500. Guggenheim Investments, which already has 14 equal-weight “smart beta” ETFs, is staking its claim on the new sector well in advance of its September 2016 debut with the launch of the Guggenheim S&P 500 Equal Weight Real Estate ETF (NYSEARCA: EWRE ). There are currently at least 33 real estate index funds on the market, but most – like the market-leading Vanguard REIT ETF (NYSEARCA: VNQ ) – are market cap-weighted. As a result, Simon Property Group (NYSE: SPG ), by far the U.S.’s largest REIT, dominates many of these other products. But within the Guggenheim S&P 500 Equal Weight Real Estate ETF, the nearly $60 billion SPG makes up just 1/25 of the fund’s holdings, which include the 25 S&P 500 stocks currently classified in the GICS real estate group, excluding mortgage REITs. The danger of market cap-weighted indexes and funds is that overvalued components are overweighted, and undervalued components are underweighted. The Guggenheim S&P 500 Equal Weight Real Estate ETF, by contrast, practices disciplined, systematic rebalancing to reallocate from outperforming to underperforming stocks, thereby potentially capitalizing on the mean-reverting characteristic of securities and ensuring that no single stock dominates the fund’s performance. This difference in weighting does result in both risk and return differences, and equal weighted funds end up having more exposure to stocks with small capitalizations, thus resulting in a small cap bias. How does this play out in performance terms? The following chart from the S&P Dow Jones website compares the equal and cap weighted REIT indices from S&P Dow Jones (see their website for additional disclosures): As of Aug. 31, 2015. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. While the above comparison is not a pure apples to apples comparison (the S&P United States REIT Index is cap weighted, but includes REITS from all cap ranges, while the Equal Weight Index includes only REITS in the S&P 500 Index), the performance of the indices do bear out some differences over time. “The time-tested equal weight strategy can help long-term performance by reducing the bias towards the largest individual companies within a particular cap-weighted strategy,” said William Belden, Guggenheim’s Managing Director of Product Development, in a recent statement. “An equal-weight approach also may enhance portfolio diversification by reducing concentration risk often found in cap-weighted indices and provide a more balanced exposure across market capitalizations.” For more information, visit the fund’s webpage . Past performance is not necessarily indicative of future performance Scalper1 News
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