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Diversification by Equal Weight index.


Does an Equal weight index complement a market value (capitalization) based index?

To offset the iShares S&P/TSX 60 market value weighted ETF (XIU), say, investors might compare HorizonsAlphaPro TSX 60 Equal Weight ETF (HEW). (Note: HEW is an ‘actively managed’ ETF so the comparison is not apples-to-apples).

If you wanted more of Canada but had a concern about over concentration to Canadian Banks, Energy and Materials stocks (roughly 1/3rd each of the index), then an Equal weight ETF appears to ‘spread a wider net’.

After the ~1.6% duplication of the largest stocks, smaller (and more) stocks become more important in the Equal weighted index ETF. Credit Suisse claims that smaller companies outperform over long time periods. If so, then HEW is worth a look. Eventually.

Friday, January 14th, it had zero volume. And maybe, someday, the MER can be deciphered.

ClaymoreInvestments.ca and Bank of Montreal also have Equal Weight ETFs. Also with minimal volumes as yet.

iShares.ca S&P/TSX 60 (XIU)                                  MER 0.176% Horizons AlphaPro S&P/TSX 60 Equal Weight Index ETF                                (HEW)                                                        MER 0.50% plus 20% performance fee above benchmark plus Operating expenses plus Redemption charge
ROYAL BANK 6.50% ROYAL BANK 1.63
TD BANK 5.68% TORONTO-DOMINION BANK 1.68
SUNCOR ENERGY 5.25% BANK OF NOVA SCOTIA 1.68
BANK OF NOVA SCOTIA 5.18% SUNCOR ENERGY INC 1.60
BARRICK GOLD 4.54% BARRICK GOLD CORP 1.86
CDN NATURAL RES’s 4.23% CDN NATURAL RESOURCES 1.62
POTASH CORP 3.61% GOLDCORP INC 1.75
GOLDCORP INC 3.15% BANK OF MONTREAL 1.60
BANK OF MONTREAL 2.88% POTASH 1.51
CIBC 2.74% CN RAILWAY 1.68

Tomorrow?

Do Dividend index ETFs offset each other?

Doug Cronk, CFA is Manager, Investments for a Canadian Pension fund.

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