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As someone who knows very little about finance, is there any ETF available which acts as a middle-ground between market-cap weighted and equally-weighted funds?
by bspammer 1y ago
As someone who knows very little about finance, is there any ETF available which acts as a middle-ground between market-cap weighted and equally-weighted funds? The very high concentration of tech and AI in the S&P 500 at the moment makes me uncomfortable, but equal-weight seems too drastic to me. A fund where the weighting is done by the square root of the market cap feels like it would make sense but I can't find anyone doing this.
- randomtoast 1y agoI think even a square root cap approach alone is not very balanced. There are ETFs that consider fundamentals, such as book value, cash flow, and sales. In these fundamental-weighted ETFs, AI companies that burn large amounts of cash are rated much lower compared to their weighting in market cap-based ETFs.
- onlyrealcuzzo 1y agoSeems like a portfolio balanced by P/Es would do most of what you want. If Tesla has a 200 P/E and MSFT has a 40 P/E, and the s&p has an average of 20, you'd have 1/10th the Tesla and 1/2 the MSFT shares as a traditional ETF.
- conditionnumber 1y ago> A fund where the weighting is done by the square root of the market cap feels like it would make sense but I can't find anyone doing this Trading costs. A cap-weighted portfolio manages itself. Square root cap weighting is going to trade a lot, and that's expensive.
- bspammer 1y agoAhh that makes a lot of sense, thanks. I hadn't considered how elegant it is that the fund stays balanced without trading.
- jbjbjbjb 1y agoMaybe do a portfolio of S&P 500 ex mag 7, market cap and equal weight and see if you can get the aggregate weights to match (within reason) sqrt weights.