ETF Index Types
ETFs have created an indexing revolution (for the basics on indexes, see how indexes work). The growing popularity of ETFs has led many firms to create new types of indexing methodologies, or new variations of old indexing concepts. Here are some of the major types of indexes finding their way into ETF offerings:
- Capitalization weighted: This is the traditional way indexes have been constructed: an index where the representation of each stock is weighted in proportion to its market capitalization.
- Dividend weighted: An index where the representation of each stock is weighted in proportion to the dividends it pays.
- Earnings weighted: An index where the representation of each stock is weighted in proportion to its earnings.
- Equal weighted: An index or basket of stocks where the representation of each stock is initially equal (dollar amounts), rather than weighted in proportion to capitalization or some other metric.
See also: How indexes work