New Fund Puts S&P 500 Stocks on Equal Footing

Like many trendsetters, Charles Dow probably didn't quite realize what he was on to when he first published a list of the closing prices of 12 stocks in The Wall Street Journal in 1896.

Now, 100 years and several hundred indices later, Dow's original intent -- to represent the economic strength of the country -- has been reinvented, rejiggered, licensed and marketed for a variety of reasons. Newest on the scene is the equal-weighted S&P 500 index, which venerable indexing giant Standard & Poors has created at the behest of Rydex Funds, which produced an exchange-traded fund based on the index. The new ETF begins trading today on the American Stock Exchange under the symbol RSP.

"In some cases, equal weighting is the simplest and most straightforward way of indexing," says Chuck Tennes, portfolio director at Rydex, who adds that it minimizes overweighting in different sectors. "These funds are just modules to be used in building a risk-adjusted portfolio for investors."

Variations on a Theme

The equal-weighted S&P 500 ETF is the latest in a long line of variations on an indexing theme. Later indices, like the S&P 500 and the Wilshire 5000, were expanded versions of Dow's original one, and more accurately track the market. Now, though, investment banks and the exchanges themselves can create an index to reflect pretty much whatever they want -- and then license the use of the index to mutual funds and portfolio managers who want to base their products on it. Also, options, futures and other derivatives can be traded based on an index.

There's no alchemy in the process: Stock indices are simply a composite of equities with similar characteristics, such as size or sector, whose changes are measured from a base period. The base date and base value, determined when creating the index, are fairly arbitrary. Each index operates according to its own set of rules that dictate, among other issues, how often the component stocks get re-evaluated (which could be every two weeks or whenever the urge strikes) and how the component equities and their movements affect the level of the index.