EWRS: What kind of "equal" weight is THIS?

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nisiprius
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EWRS: What kind of "equal" weight is THIS?

Post by nisiprius » Sun Dec 28, 2014 10:30 pm

Original text of posting--but see "double take" addenda below.

EWRS Guggenheim Russell 2000® Equal Weight ETF

"Investment Objectives: Seeks to correspond as closely as possible, before fees and expenses, to the price and yield performance of the Russell 2000® Equal Weight Index."

"Number of stocks: 1959"

One would therefore expect each stock to constitute 1/2000 or maybe 1/1959, but anyway, within rounding error 0.05% of the fund's holdings.

Holdings

Code: Select all

Security Name       Ticker    Shares    Market Value        % of Net Assets

PANTRY INC.         PTRY      3,370     $124,454.10         0.29%     Consumer Staples
CHEFS WAREHOUSE     CHEF      5,165     $113,784.95         0.26%     Consumer Staples
OMEGA PROTEIN CORP  OME       10,710    $112,669.20         0.26%     Consumer Staples
....
REX ENERGY CORP     REXX      8,979     $45,523.53          0.10%     Energy
SENOMYX INC.        SNMX      7,243     $45,413.61          0.10%     Materials
....
ANALOGIC CORP       ALOG      166       $14,380.58          0.03%     Health Care
Kindred Biosciences KIN       2,092     $14,372.04          0.03%     Health Care
....
IMMUNOGEN INC       IMGN      1,387     $8,224.91           0.02%     Health Care
ALTISOURCE ASSET    AAMC      22        $7,392.00           0.02%     Financials
Hoo hah? The fund holds 16 times as much Pantry, Inc. as it does of Immunogen. What sort of "equal" is this?

Guggenheim Russell 1000® Equal Weight ETF, EWRI is the same... everything should be 0.10%, but in fact the holdings taper from Rite Aid, 0.27% down to KLX INC, 0.02%.

Even RSP, which should all be 0.20%, varies from 0.24% down to 0.10% and 0.07%.

DOUBLE-TAKE #1:

:oops: OK, I figured it out. Russell Equal Weight Indexed:

"The Russell Equal Weight Indexes offer a unique and practical alternative to conventional equal weighted indexes. Rather than simply assigning an equal weight to each constituent of the index, Russell's sector equal weight index methodology equally weights each sector within the index and then equally weights the companies within each sector."

DOUBLE-TAKE #2:

NO, WAIT. It's still not right. Within each sector, the companies are supposed to be equally weighted--yet the "Industrials" range from West Corp, 0.19% down to ACTUANT CORPORATION, 0.04%. One of these "equally weighted" companies has over four times the weight of the other.
Last edited by nisiprius on Sun Dec 28, 2014 10:46 pm, edited 5 times in total.
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Re: EWRS: What kind of "equal" weight is THIS?

Post by TradingPlaces » Sun Dec 28, 2014 10:38 pm

That's quite funny :)

IMO, for the reasons mentioned in the other thread, it is practically impossible to run EW indices below R1K.

The 2500th stock in Russell 3000 probably does not trade at all.

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Re: EWRS: What kind of "equal" weight is THIS?

Post by Tamales » Sun Dec 28, 2014 10:40 pm

I recall an article on that once.
This isn't the one I recall but it serves the purpose: http://www.etf.com/EWRS

"The Guggenheim Russell 2000 Equal Weight ETF takes an interesting weighting approach to small caps: EWRS is first weighted equally by sector (i.e. all sectors are given the same weight), and then the constituents within each sector are weighted equally. This methodology yields a bias towards micro-caps and has sector tilts relative to our cap-weighted benchmark, especially an underweight to financials."

Definitely not equal weight by any intuitive definition.

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Re: EWRS: What kind of "equal" weight is THIS?

Post by nisiprius » Sun Dec 28, 2014 10:47 pm

Tamales wrote:I recall an article on that once.
This isn't the one I recall but it serves the purpose: http://www.etf.com/EWRS

"The Guggenheim Russell 2000 Equal Weight ETF takes an interesting weighting approach to small caps: EWRS is first weighted equally by sector (i.e. all sectors are given the same weight), and then the constituents within each sector are weighted equally. This methodology yields a bias towards micro-caps and has sector tilts relative to our cap-weighted benchmark, especially an underweight to financials."

Definitely not equal weight by any intuitive definition.
Yeah, I figured that out. But then I looked more closely, and it still seems wrong. Within the "industrials" there is more than a 4:1 difference in weight between the stocks in that sector.
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Re: EWRS: What kind of "equal" weight is THIS?

Post by TradingPlaces » Sun Dec 28, 2014 10:50 pm

This is
Last edited by TradingPlaces on Sat Jan 24, 2015 1:07 am, edited 1 time in total.

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Re: EWRS: What kind of "equal" weight is THIS?

Post by TradingPlaces » Sun Dec 28, 2014 10:51 pm

nisiprius wrote:
Tamales wrote:I recall an article on that once.
This isn't the one I recall but it serves the purpose: http://www.etf.com/EWRS

"The Guggenheim Russell 2000 Equal Weight ETF takes an interesting weighting approach to small caps: EWRS is first weighted equally by sector (i.e. all sectors are given the same weight), and then the constituents within each sector are weighted equally. This methodology yields a bias towards micro-caps and has sector tilts relative to our cap-weighted benchmark, especially an underweight to financials."

Definitely not equal weight by any intuitive definition.
Yeah, I figured that out. But then I looked more closely, and it still seems wrong. Within the "industrials" there is more than a 4:1 difference in weight between the stocks in that sector.
Two questions:

- 4:1 weight difference is between which stocks? Top and bottom?
- how frequent are the rebalances?

4:1 is a bit too much, but within small caps, you could easily have stocks that move 10-20% a day.

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Re: EWRS: What kind of "equal" weight is THIS?

Post by Tamales » Sun Dec 28, 2014 11:43 pm

According to this link the tracking error is .38, compared to .09 tracking error for IWM (which tracks the russell 2000 cap wtd index).
https://screener.fidelity.com/ftgw/etf/ ... mbols=EWRS

But I confess I'm not entirely sure how to interpret the .38 tracking error. I thought it was relative to 1 standard deviation, so that would seem to say that 68% of the time, this fund is within 38% (I guess that's what .38 means) of its benchmark, which seems poor but maybe I'm not interpreting that right. Maybe it's .38%, which would make a little more sense. Like most measures, there are probably a dozen different ways to calculate tracking error.

I wonder, does the SEC have some requirement that you can't call yourself an index fund if your tracking error is more than some limit?

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Re: EWRS: What kind of "equal" weight is THIS?

Post by nisiprius » Mon Dec 29, 2014 10:24 am

TradingPlaces wrote:Two questions:

- 4:1 weight difference is between which stocks? Top and bottom?
- how frequent are the rebalances?

4:1 is a bit too much, but within small caps, you could easily have stocks that move 10-20% a day.
Well, you can look at the holdings list for yourself. I actually threw out some things at the top and bottom I thought were outliers.

If we look just at "industrials," it's a smooth gradation. It's not just one or two weird extremes. It's not like one stock soared just before they took the snapshot or something.

WEST CORP WSTC 2,376 $80,356.32 0.19% Industrials
PENDRELL PCO 57,294 $78,492.78 0.18% Industrials
CIVEO CORP CVEO 6,676 $53,808.56 0.12% Industrials
POWERSECURE INTERNATIONAL POWR 4,537 $52,084.76 0.12% Industrial

at the top. There are lots and lots at around 0.10%, 0.09%--

POLYPORE INTERNATIONAL IN PPO 868 $41,846.28 0.10% Industrials
BUILDERS FIRSTSOURCE INC BLDR 6,113 $41,690.66 0.10% Industrials
COMFORT SYSTEMS USA INC FIX 2,385 $41,546.70 0.10% Industrials
GIBRALTAR INDUSTRIES INC ROCK 2,561 $41,385.76 0.10% IndustrialsAAON INC AAON 1,793 $40,109.41 0.09% Industrials
INTERFACE INC TILE 2,416 $40,105.60 0.09% Industrials
GLOBAL BRASS & C BRSS 3,180 $40,068.00 0.09% Industrials
SIMPSON MANUFACTURING CO SSD 1,140 $39,877.20 0.09% Industrials
RBC BEARINGS INC ROLL 612 $39,859.56 0.09% Industrials
PATRICK INDS INC PATK 895 $39,845.40 0.09% Industrials
Continental Building Products, Inc. CBPX 2,242 $39,817.92 0.09% Industrials
UNIVERSAL FOREST PRODUCTS UFPI 753 $39,765.93 0.09% Industrials
BEACON ROOFING SUPPLY INC BECN 1,404 $39,677.04 0.09% Industrials
L.B. FOSTER COMPANY-CL.A FSTR 798 $39,620.70 0.09% Industrials

and there are plenty, plenty, plenty down around 0.05%:

ORBITAL SCIENCES CORP ORB 806 $22,092.46 0.05% Industrials
GRAFTECH INTERNATIONAL LT GTI 4,469 $21,585.27 0.05% Industrials
WABASH NATIONAL WNC 1,749 $21,582.66 0.05% Industrials
ASTRONICS CORP ATRO 399 $21,482.16 0.05% Industrials
KRATOS DEFENSE & KTOS 4,198 $21,409.80 0.05% Industrials
MANITEX INTERNAT MNTX 1,788 $21,366.60 0.05% Industrials
KIMBALL INTERNATIONAL INC KBAL 2,104 $21,355.60 0.05% Industrials
USA TRUCK INC USAK 796 $21,237.28 0.05% Industrials
VOLCANO CORP VOLC 1,187 $21,235.43 0.05% Health Care
LAYNE CHRISTENSEN CO LAYN 2,072 $21,196.56 0.05% Industrials
TASER INTERNATIONAL INC TASR 786 $21,151.26 0.05% Industrials
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Re: EWRS: What kind of "equal" weight is THIS?

Post by pkcrafter » Mon Dec 29, 2014 10:48 am

I guess you can name a fund anything you want if it catches some new investors. :confused
Next year they may come out with the parity weighed, value parity, or even alphabetical equally-weighted portfolio all will still be the same portfolio. :oops: Obviously, the name is much more important than the actual holdings. Thanks for the enlightenment of' the day.


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Re: EWRS: What kind of "equal" weight is THIS?

Post by Epsilon Delta » Mon Dec 29, 2014 10:57 am

You can implement an index fund using sampling rather than full replication. The tracking error is going to be larger for an equal weighted index that a cap weighted index, but it could be close enough.

A sampling approach would reduce transactions and avoid having to buy everything all the time. For less liquid shares you could just wait until somebody wants to sell them.

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Re: EWRS: What kind of "equal" weight is THIS?

Post by nisiprius » Mon Dec 29, 2014 12:28 pm

Curiouser and curiouser. EWEM, Guggenheim MSCI Emerging Markets Equal Weight ETF.

Well, they sure aren't using replication here!

I thought this would be interesting, because unlike the Russell 2000 [so-called] Equal Weight indexes, in this case the index itself seems straightforward enough. None of that "first equal-weight the sectors" step.

MSCI Emerging Markets Equal Weighted Index
The index includes the same constituents as its parent (large and mid cap securities from 23 EM countries). However, at each quarterly rebalance date, all index constituents are weighted equally, effectively removing the influence of each constituent’s current price (high or low). Between rebalances, index constituent weightings will fluctuate due to price performance.
With 833 constituents you'd expect each one to be 1/833 = 0.12% of the total, and the top 10 constituents are shown as ranging from 0.16% down to 0.14%.

But when we look at the holdings of the ETF, we find that it includes 504 stocks, and throwing out some weird stuff they range from a dozen companies that have around over 0.26% each, down to a dozen that have under 0.11% each.

What's weirder still is three of the largest holdings: the Wisdomtree India ETF (EPI), the IShares MSCI Brazil index ETF (EWZ), and the iShares MSCI Qatar Capped ETF (QAT). Now, just a reality check: no, these are not equal-weighted ETFs or close to it. Looking at the quickly-found ten largest holdings, for EPI they range from 7.75% down to 1.81%; For EWZ, from 8.53% to 2.21%; for QAT, 15.53% to 3.64%!

Does this matter in terms of tracking the index? I don't know. Since I don't understand the logic behind equal-weighting other than "anything, anything but not cap-weighting" or "a strange way to get a small-cap tilt," I don't know whether that logic is disturbed much by swapping out "equal weightings of Indian stocks" and swapping in "some other company's not-at-all-equally-weighted Indian stock ETF."
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Post by Taylor Larimore » Mon Dec 29, 2014 12:59 pm

Fund companies often market exotic funds knowing they will attract greedy investors hoping to "beat the market."

Morningstar rates this fund (EWRS): "Below Average Return" with "Above Average Risk".

http://performance.morningstar.com/fund ... ture=en-US
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Re: EWRS: What kind of "equal" weight is THIS?

Post by House Blend » Mon Dec 29, 2014 1:30 pm

Coming soon at Orwell Investments: AFEWX (Animal Farm Equal Weight Index Fund), where all stocks are equally weighted, but some are more equal than others.

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Re: EWRS: What kind of "equal" weight is THIS?

Post by pkcrafter » Mon Dec 29, 2014 5:36 pm

House Blend wrote:Coming soon at Orwell Investments: AFEWX (Animal Farm Equal Weight Index Fund), where all stocks are equally weighted, but some are more equal than others.
Yes, this is where the chickens and cows weigh the same.

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Re: EWRS: What kind of "equal" weight is THIS?

Post by stlutz » Mon Dec 29, 2014 8:17 pm

The index is re-weighted each quarter, not every day. The last one was the Friday before Christmas. I'm sure you don't expect the ETF to instantaneously reweight given the very small size of most of these companies?

It's actually done a decent job of following the index, so it looks like the managers at least sort of know what they are doing.

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