“Equally weighted indices are not investable because they are not rebalanced often” Is it a true statement ?
No I don’t think so I think it depends on what type of investment objective you are looking for. If you rebalance once a year and don’t mind tracking risk then it can be a momentum play.
What??? I don’t see the connection in the statement. First of all, the statement is false. Equally weighted index means buy $1 of of each stock…if it is not investable it could be the the index treat small cap equally comparing to large cap, however, small cap is less liquid. An equally weighted index actually requires more rebalacing.
If you had an equal weighted index, you’d have to rebalance often (more often than cap weighted), but I see no reason that you couldn’t invest in an equal weighted index. In fact, it’s probably easier to invest in an equal weighted index than a market weighted index, since you wouldn’t have to worry about computing market caps for each item in the index.
I think what it says is - let’s say - day1…you put in $1 in each stock of the index. At the end of day1, the $1 for each stock would have changed to a new amount due to market movements. On day2, in a equal weighted index you would pretend nothing happened and start off with $1 in each stock. Whereas, if you were actually trying to mimic the index you would be left with the problem of trying to figure out how to rebalance it. You would have buy some stocks and sell some to get it back to $1 in each stock. This means equally-weighted indices are not investable (as rebalancing is a problem).
With equally weighted, you place an equal quantity in each stock in the issue. So let’s suppose that the index has 10 stocks in it, and you have $100MM to put in the index. Day 1, you put 1/10 of your total portfolio in the index, or 10M (ok, these are large caps, I guess). It fluctuates, and at the end of the day you are up 1%. Day 2, you now now start off with 101M. You now put 1/10 of your total portfolio in each stock. This is 10.1MM. Now for some stocks, you’re going to have to sell to get your exposure down to 10.1MM, and you’re going to use the proceeds to buy stocks for the ones whose value in your portfolio is less than 10.1MM. Every day you do this. Lots of transaction costs. But certainly investible. The key would be how often to rebalance the index… do you do it daily, weekly, monthly, hourly? OK, I see where the investibility issue would come in. You don’t really need to rebalance the cap-weighted portfolio at all, other than to account for new equity issues, so it’s much easier to invest in and doesn’t require discounting transaction costs. I still don’t see why an equal weighted index wouldn’t be investible, though - you would simply need to specify the rebalancing schedule.
In theory its NOT Investable…In order to get say every stock holding to $1000 you would need to hold partial shares, which most banks/custodians sweep out of your accounts as no one likes partial shares. So it wouldn’t be “equal” weighted. Could you approximate it, Sure, but its’ going to be costly b/c of the constant rebalancing costs.
the statement is from schweser mock exam 2
So what did Schweser say?