Below are two ETF’s related to the oil market sector – one is capitalization weighted (IYE) and the other is Equal weighted (RYE).
You can see from three stocks that are common to BOTH ETF’s that their percentages in the respective ETF’s are very different and you will also note that the performance of the cap weighted ETF – IYE was SIGNIFICANTLY better (almost 5 times better) since the beginning of 2009.
Rydex S&P Energy ETF (RYE)
- Exxon Mobil Weight = 2.60%
- Chevron Weight = 2.60%
- Conoco Phillips Weight = 2.70%
- Total = 7.9%
iShares Dow Jones Energy ETF (IYE)
- Exxon Mobil Weight = 21.19%
- Chevron Weight = 11.87%
- Conoco Phillips Weight = 5.47%
- Total = 38.53%
The lesson learned here is that you have to do some research into each ETF to see how they are weighting their holdings and if you feel that their weighting is appropriate. You can get this information from each ETF’s website. In the case of oil in 2009 it was obviously better to have the ETF with the larger stocks move heavily weighted, probably due to the fact that instutional investors can move in and out of the larger cap companies more easily. In regard to the solar market segment, at this time I feel that it would be best to try and find an ETF what gave relatively EQUAL weight to all solar stocks since the industry is so new and is highly volatile.