Several common weighting types for index ETFs (2)

4. Price weighting

As the name implies, the weighting is based on the company's price level.

Pros: simple calculation method.

Cons: The index is most influenced by high priced stocks and requires adjustments for component stock splits and stock consolidations.

The old index Dow Jones Industrial Average is price-weighted. Japan's Nikkei 225 index is also price-weighted. Although this type of weighting makes little sense, because the Dow is the oldest stock index in the world, it is influential and widely used. Wide.

5. dividend weighted

Pick stocks based on the company's dividend and also determine the weighting of constituent stocks based on the dividend.

Pros: you can avoid some companies that don't pay dividends

Cons: There is no necessary correlation between the amount of dividends paid and the return on investment in the stock

This method can avoid some companies that do not pay dividends and focus on those that pay more dividends. Investors can therefore avoid investing in companies that like to "pie" or manipulate the income statement, after all, dividend falsification is a major problem. The likelihood is low that companies whose EPS are wildly different from their cash flow will not be included in this portfolio.

While more company dividends mean more company cash flow, dividend-weighted ETFs may not necessarily give you a very high return, because There is no necessary correlation between the amount of dividends and the stock's return on investment. High dividend companies are generally more mature, stable cash flow, growth will be relatively low; and some small weighting of low dividend companies, retaining Earnings may be used to expand reproduction, higher growth, if the pursuit of sustained high dividends will bring a lot of financial pressure on the company. .

These ETFs typically favor stocks of certain types of companies, such as utilities and financials. Typically SDY,SDY tracks the S&P 1500 Composite Index (S&P 1500 Composite Index), a dividend-weighted index of 50 dividend-paying companies, which has for 20 consecutive years Dividend Increase.

6. market capitalization tiered weighting

The weighting is graded according to the market capitalization. It combines the advantages of market capitalization weighting and equal weighting, has a certain momentum factor, and can relatively balance the weighting between high and low stocks. Rising stocks will be actively sold in part during the adjustment period, while a sample that has fallen more in the early stages will be bought during the adjustment period.

Typically represents the Nasdaq 100 Index: individual weightings are capped at 24%, with weights above 4.5% not adding up to 48%.