Tony Davidow has a tough job. As the new ETF strategist for Rydex|SGI, he's tasked not only with getting the word out on the company's view of the ETF space, but also the benefits of equal weight investing.
"Growth over the last several years has been fueled by demand from investors who are seeking a more efficient and effective way of gaining exposure to various market segments across sectors and geography," Davidow says. "Equal weight investing (versus traditional cap weighting) is one way to do that."
Davidow joined Rydex|SGI in December 2010 from IndexIQ, where he was head of distribution. Before that, he was a managing director at Morgan Stanley, where he ran sales and training operations for the consulting side of the business and built CSG University Program, the consulting group's training program. He's also worked for the American Stock Exchange and Graystone Wealth Management.
With that level of experience, it's safe to say he knows of what he speaks, and education is a core part of his communication strategy. He's written numerous white papers (read one at www.advisorone.com/RydexEqualWeightETFs) and speaks often on topics such as core-satellite investing, asset allocation, international investing and alpha-beta separation, among others.
"If you think of the S&P 500, what a lot of people don't realize is the way that they own those 500 stocks," Davidow says, when asked specifically how he brings his message to the masses. "It's very top heavy. The top 10 names represent 20% of the index. The top 50 names represent 50% of the index. It's concentrated on a handful of names. A lot of investors don't realize that. They just assume that the S&P is the market, and that's what they own."
This tilt, he explains, favors large, mega-cap names. So, as the name suggests, equal weight takes those same 500 names, but rather than overweight the biggest ones, an equal weight is applied across them all. Although Rydex has utilized the approach for some time, it's only recently that they've added ETF components.
"The first index fund in 1971 was, in fact, equal weight," he says. "The idea of equal weighting or an alternative way of going into market has been out there for a while, but there really haven't been commercially available investment solutions. Rydex offered the solution in 2003, and we've had great results. In 2006, we offered sector strategies. In December and January of this year, we expanded the family once again and offered six additional equal weight ETF strategies."
While reluctant to take up the ETF versus mutual fund debate (since both, he says, have a place in the portfolio), he likes the ETF structure because it means investors of all sizes and sophistications can own the market in an equal weight fashion. One of the compelling arguments with the equal weight S&P story previously referenced, he says, is that relative to the cap weight equivalent, equal weight has delivered superior results—not surprising given the reduction in concentration risk.
"When you're allocating more evenly across the portfolio, you're in a position to have the smaller names contribute more to the results," he adds. "But what often gets glossed over in the equal weight debate is to retain the integrity of the process by dynamically rebalancing on a quarterly basis. By doing so, we're applying investment discipline that forces us to trim those names and sectors that have appreciated the most in the portfolio, and then to buy those that perhaps are underappreciated and undervalued in the portfolio. And that's central to our equal weight process.
So what, specifically, makes Rydex an overlooked manager in this space?
