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URL:  https://boards.fool.com/i-thought-the-explanation-was-much-simpler-most-20778668.aspx

Subject:  Re: Rydex equal weight S&P ETF Date:  5/17/2004  1:25 PM
Author:  Rijer Number:  41030 of 92423

I thought the explanation was much simpler. Most ETFs are cap weighted which means that as prices of the component stocks change, the weighting in the ETF shifts proportionally. Rebalancing due to price changes is not needed.

However, for an equal weighted index like this Rydex, any price change of a component stock will cause a shift in the balance. For example, when a single stock increases by 20%, this would cause the stock to be overweighted by 20%. Thus there will be a need for constant rebalancing. I think the fund only rebalances once per quarter, but this results in transaction costs and tax gains which would be passed along to the investor.
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