New Fund Puts S&P 500 Stocks on Equal Footing

A price-weighted index, like the Dow, measures the change in the prices of the component stocks. Price is the only variable, and higher-priced stocks dominate the index. That's why if Microsoft(MSFT) shares surge, so will the Dow.

Capitalization-weighted indices, like the S&P 500, measure change in market value. While higher capitalized stocks will move the index more, these indices are more indicative of the value of the component stocks.

Equal-dollar-weighted indices are designed to ensure that all index components have an equal weighting at the base period. That way, a 5% change in a high-priced stock has the same affect on the index as a 5% change in a low-priced stock.

"We thought about creating an equal-weighted S&P 500 index even before Rydex approached us," says David Blitzer, managing director and chair of Standard & Poor's index committee. "But it's easier to do when you have a real-life client who feels there's a market for it and is ready to license it."

Index Investing Isn't Always Conservative Investing

The advantage to investing in a product (be it an ETF or a mutual fund) that's based on the S&P 500 is that you truly are investing in the market as a whole. The 500 largest stocks included in the S&P 500 make up 80% of the U.S. stock market capitalization. "If you track 80% of something, you really have it covered," Blitzer says.

But therein lies the problem, according to some investors. The top 10 stocks in the S&P 500 make up 24.3% of the index's total capitalization. The top 40 stocks make up just over 50%. That means that 460 stocks represent the remaining half of the index's market value. While that's fine if you want to own and track the market, it's not so fine for more sophisticated investors looking to capitalize on any run up in small stocks, or who want to hedge their large-cap bets.