Weighting scheme
What is a Weighting scheme?
A Weighting scheme in an ETF context refers to the method used to allocate a fund's assets across its portfolio holdings. It determines the proportion of each holding within the ETF and directly impacts the fund's risk profile and return potential. The goal is to balance the portfolio according to the investment strategy, whether it seeks to mimic a market index or achieve a specific investment objective.
Types of Weighting schemes:
Beta: securities are weighted based on their systematic risk relative to a benchmark.
Dividends: securities are weighted according to their historical or projected cash dividends or yield.
Duration: bonds are weighted based on an estimate of their interest rate risk.
Earnings: securities are classified by their corporate earnings.
Equal: all securities are equally weighted based on their percentage of holdings.
Fixed: securities are consistently weighted using static proportions.
Fundamental: weighting is determined by financial statement measurements.
Inverse market cap: securities are weighted in the opposite order of an index.
Liquidity: holdings are weighted by their liquidity metrics, such as average trading volume.
Market cap: securities are weighted based on market capitalization, with considerations for float/liquidity and capping adjustments.
Market value: the value of outstanding securities, especially bonds, dictates the weight.
Momentum: holdings are weighted by historical price trends of securities.
Multi-factor: a blend of fundamental and technical factors determines the weighting.
Price: weight is given based on the price of securities, regardless of the total market value of equity.
Principles-based: environmental, social, corporate governance, ethical, gender-related, and other principles are applied in the weighting.
Production: weighting is derived from the dollar value of a commodity's global production.
Proprietary: a specific set of rules, sometimes undisclosed to investors or actively managed, is employed in weighting.
Revenue: companies' reported sales are the basis for the weight.
Single asset: the fund targets the return pattern of a single asset.
Target tenor: futures contracts are weighted by their maturity date.
Technical: weighting is based on historical price movements beyond just trends.
Tiered: securities are first weighted by one metric and subsequently within each group by another.
Volatility: the variance in a security’s price determines its weight.