Weighting by the reciprocal of market capitalization tilts index constituents towards the smaller end of the index, which exploits the small cap premium, reduces index concentration, and captures mean reversion.
Reverse-market-cap weighting addresses issues that are inherently created by market cap weighting, which allocates more money to large companies strictly because they are large.
The Reverse Cap Weighted U.S. Large Cap provides access and broad exposure to companies that are under represented by traditional market cap weighted indices which are susceptible to continually providing more capital to companies and industries that are potentially overvalued, at the expense of investing in companies and industries that may be under-valued.
The reverse cap approach, through its rebalancing schedule, implements a disciplined buy low/sell high strategy that may provide favorable risk-adjusted returns.
The Reverse Cap Weighted U.S. Large Cap Index is a versatile index that can be used in a variety of ways across all market conditions.
The Top 10% of the S&P 500 comprise more than half of the total index weight. By virtue of the prevalence of cap weighted indices, those same names are over-represented across many ETFs.
Therefore, in periods of intense market stress, a broad sell off may disproportionally hurt the largest constituents of cap weighted indices.
In our view, adding reverse weighting as a piece of a portfolios core large cap holdings is a great way to diversify exposure while still investing in well know, well covered S&P500 companies.
Reverse ETF provides investors investors an instrument to add portfolio exposure towards smaller cap companies within the large cap space, potentially benefiting from smaller cap tailwinds while reducing the impact of the higher liquidity, informational and volatility risks that “true small caps” may present.
When Investing in the total S&P 500 universe, portfolios can include a standard market cap weighted product, or an equal weight product, with limited options in between.
The Reverse Cap Index allows investors to precisely target their broad S&P exposure, through blending the traditional S&P 500 and the Reverse Cap Index to achieve any market cap weighting of the S&P 500 constituents to service the unique needs, targets and market outlook of the investor with ease and flexibility.
The Reverse Cap Weighted US Large Cap Index provides exposure to the companies in the S&P 500 index, weighted by the reciprocal of market capitalization.
Traditional indexes weight underlying companies by their market caps, resulting in portfolios tilted towards the largest companies.
By tilting the underlying stocks towards the smaller end of the S&P, the index captures the small cap premium within large cap, and results in an index that increases diversification while capturing mean reversion.
The Reverse Cap Weighted US Large Cap Index is licensed by Arrow Funds for the Arrow Investments Reverse Cap 500 ETF (Ticker: YPS). Find the fund on your favorite brokerage platform.
