What is the best way to cook an egg? Scrambled? Fried? Poached, perhaps? That is, of course, an impossible question because the correct answer is completely dependent on what you want the end result to be.
The same is true with index construction.
What is the best way to build an index? Market cap weighted? Sector weighted? Equally weighted? Or maybe one of the other myriad smart-beta strategies prevalent in the market today? The right answer depends completely on what you want the characteristics of your finished product, in this case the index, to be. Are you after lower volatility? Higher growth? Broader diversification?
Amid all of these potential strategies, it is one of the simplest, oldest, and elegant that quite possibly is also one of the most beneficial: the equally weighted index.
In this paper written by Shane Enete, CFA, with Biola University’s Inspire Research Institute for Biblically Responsible Investing, you will be introduced to the history of indexing, how the “traditional” indexes came to be and why there might be a better way.