Dec
23
2022
Using Fundamental Analysis to Choose Stocks
A popular method that analysts use to evaluate stocks is fundamental analysis. Learn what it is and how it’s used for stock purchases.
Read more
SoFi
Student Loan Consolidation and Refinancing
Dec
23
2022
How to Transfer Brokerage Accounts: 6 Steps
If an investor is unhappy with their current brokerage firm’s service or tools, they shouldn’t let the hassle of the transfer process keep them from switching to brokerages. Putting off a transfer may keep investors from future portfolio growth because they don’t enjoy using the platform or are paying high fees.
Transferring brokerage accounts is not the huge hassle people might think it is. While it’s not as fast as certain cash payment services, the process only requires a few forms and patience to get it done. Keep reading to learn more about moving your investments from one account to another.
When to Consider Switching Brokers
There are several reasons why an investor might consider switching brokers, including the following:
• High fees: If you pay high investment fees and commissions to your current broker, you may find a more cost-effective option by switching to a different broker. Many online brokerage firms now offer very low or no commissions.
• Lack of customer service: If your current broker is not meeting your needs in terms of the types of investment products they offer, the level of customer service they provide, or the quality of their trading platform, you may want to consider switching to a different broker that better meets your needs.
• Changes in your investment strategy: If you plan to make significant changes to your investment strategy, such as switching to a new asset class or adopting a new approach to trading, you may want to consider switching to a broker better equipped to support your new strategy. For example, your current broker may not offer options trading, but you’d like to start using options to speculate, generate income, or hedge risk.
• Changes in your financial situation: If your personal finances change significantly, consider reviewing your broker to ensure it is still the best fit for your needs. For instance, your current broker may have a minimum account balance you can no longer meet.
However, switching brokerage accounts can be time-consuming and potentially costly, so it’s important to consider whether the benefits outweigh the costs.
Two Ways to Transfer Assets to Another Broker
When transferring a brokerage account from one broker to another, there are two main ways investors can transfer assets: cash transfer and in-kind transfer.
Cash Transfer
A cash transfer involves selling the assets in the account and transferring the proceeds to the new broker in the form of cash. A cash transfer is a straightforward and quick way to transfer an account, but it may not be the most tax-efficient option, as it could trigger capital gains or losses that may be subject to taxes.
💡 Recommended: Capital Gains Tax Guide: Short and Long-Term
In-Kind Transfer
An in-kind transfer involves transferring the assets in the account directly to the new broker without selling them. This may be a more tax-efficient investing option, as it allows you to carry over the cost basis of the assets to the new broker. However, executing an in-kind transfer may be more complex and time-consuming, as it may require the transfer of specific securities or other assets rather than just cash.
How to Move Investments From One Brokerage Account to Another
The process for transferring cash or securities from one brokerage account to another typically involves the following steps:
1. Confirming Account Information
Before an investor starts the transfer process, they should take some time to review their existing account, taking note of the assets they hold, total amounts held, and basics like account numbers and information on file.
Having a snapshot of account totals can serve as a backup if anything goes wrong in the transfer. Investors might want proof of their assets for confidence before getting started.
2. Contacting the New Broker
To kick off the process, an investor would reach out to their new broker, also known as the “receiving firm,” in the transfer. Each brokerage firm will have a slightly different transfer process, but most accounts will be transferred in an automated process through the help of the National Securities Clearing Corporation (NSCC).
NSCC runs Automated Customer Account Transfer Service (ACATS), a service that allows accounts to be transferred in a standard way from one brokerage firm to another. ACATS should work for most transfers, including cash, stocks, and bonds.
When an investor contacts the receiving firm, they’ll receive instructions and, often, a physical or digital copy of the Transfer Initiation Form (TIF). At this stage, investors don’t need to reach out to their old brokerage firm.
3. Completing a Transfer Initiation Form (TIF)
Completing the standard TIF officially kicks off the process. Once the receiving firm has an investor’s TIF, they’ll start making arrangements with the investor’s old brokerage firm, or “delivering firm,” to send the assets over.
Investors should take care to complete the TIF thoroughly and correctly. If information (such as Social Security number, name, or address) is not the same with both the delivering and receiving firms, the request could be flagged as fraud and rejected.
That means confirming an investor’s receiving and delivering firms have the correct personal information on file.
The most common hold-up in the transfer process is an investor error in the TIF.
TIFs typically include the following information:
• Numbers for both brokerage accounts
• The brokerage account type, such as joint, individual, Roth IRA, trust, estate, limited liability, 401(k), etc.
• Social Security number
• The delivering firm’s contact information
• Specific assets to transfer in the event of a partial transfer
4. Submitting the TIF, and Sitting Tight
The investor will submit the TIF to their receiving firm when everything looks complete. From there, the investor will wait.
While the investor can’t do much more than sit on their hands and wait, the receiving firm is entering the TIF into ACATS. This information becomes a digital request submitted to the delivering firm, requesting a transfer of assets from one brokerage to another.
When the TIF is being reviewed, investors should pay close attention to their email and phone. If there’s any mismatched information on the TIF or between the two firms, the receiving firm will likely reach out to the investor to amend the issue.
Missing outreach could mean an even longer transfer period. That’s why investors should double-check that all the information on the TIF and between the two brokerages is consistent.
If the form is correct and approved by the delivering firm within the appropriate window, they will send a list of assets to the receiving firm. Now, it’s the receiving firm’s time to accept or reject.
While uncommon, a brokerage can reject the assets. Thus, an investor might consider contacting the receiving firm before the transfer to confirm their assets will be accepted. The receiving firm gets to decide if they want to accept or reject those assets.
If the assets are accepted, the delivering firm will digitally move the holdings to the receiving firm.
5. Contacting Your Old Broker (Optional)
In the world of texting, a phone call might be the last thing a person wants to do. But a simple call could save a few bucks in the transfer process. One hiccup that can come from the process is the account transfer fee. In some instances, the delivering firm will charge an “exit fee” when an investor makes a full transfer, partial transfer or decides to close an account entirely.
To avoid the surprise of a fee, an investor may reach out to their old brokerage firm and ask if they’ll be charged a fee for leaving or transferring funds.
If the delivering firm charges a fee, investors could reach out to the receiving firm to ask if they have any promotions for new clients that would cover the cost of transfer fees.
6. Watching the New Account, and Waiting
After the delivering and receiving firms approve the transfer request, it will still take a few days for the investments to move accounts.
Investors shouldn’t be alarmed when assets disappear from both accounts for a day or two, but the process typically takes no more than six business days.
The process may take longer if the delivering firm is not a broker-dealer. The transfer often takes longer than six business days if the delivering firm is a bank, mutual fund, or credit union.
No matter the length of the transfer, it’s common for one or both of the brokerage accounts involved to be frozen. That means no trades are allowed until the process is complete.
Investors may plan ahead and avoid trading during this period. If there is a stock or fund investors are looking to sell in the near future, they might want to sell it before starting a transfer.
Get up to $1,000 in stock when you fund a new Active Invest account.*
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Special Circumstances That Can Affect the Stock Transfer Process
Transferring Retirement or Other Tax-Advantaged Accounts
Transferring a tax-advantaged brokerage account, such as an individual retirement account (IRA) or 401(k) account, from one broker to another generally follows a similar process to regular brokerage accounts.
However, if you transfer a tax-advantaged account, you may need to follow certain rollover rules to avoid triggering taxes. For example, if you transfer an IRA, you generally have 60 days to complete the rollover and deposit the assets in the new account to avoid taxes and penalties.
💡 Recommended: IRA Transfer vs Rollover: What’s the Difference?
Transferring Stocks to Another Person
Transferring or gifting stocks to another person may have tax implications. For instance, transferring stocks may trigger gift taxes depending on their value.
Understanding Brokerage Transfer Fees
Brokerage account transfer fees are charges that may be assessed by a broker when an investor transfers their account from one broker to another. The new or old brokerage may charge these fees, which can vary depending on the broker and the assets being transferred.
Some common types of brokerage account transfer fees include:
• Account transfer fees: These are fees that the current broker may charge for transferring the account to the new broker.
• Termination fees: Some brokers may charge termination fees for closing an account or transferring assets out of the account.
• Trade execution fees: If you need to sell any assets in your account to transfer them to the new broker, you may be subject to trade commission fees.
Keeping Records From Your Old Account
It’s generally a good idea to keep records from your old brokerage account following an account transfer, as these records may be helpful for various purposes.
For example, you may need to refer to your old brokerage account records for tax purposes. The information in these records can help you accurately report any capital gains or losses subject to taxes.
You may also need to refer to your old brokerage account records if you need to resolve any disputes or errors related to the transfer of your account or the assets held in the account.
Tax Implications of Switching Brokers
The tax implications of switching brokers will depend on several factors, including the type of assets held in the account, the method used to transfer the assets, and your tax situation.
If you sell and cash out stocks in your account to transfer them to the new broker, you may incur capital gains or losses that could be subject to taxes.
Additionally, the transfer may affect the cost basis and holding period of the assets in your account. The cost basis is the amount you paid for the asset, and the holding period is the length of time you have owned the asset. These factors can affect the amount of any capital gains or losses that may be subject to taxes.
Switching to SoFi Invest
People might put off transferring their brokerage account because they believe it’s involved and complicated. While it’s not instant, the process typically takes just six business days from start to finish. That means investors are only a few days and a simple form away from a new brokerage service. As long as an investor is careful and asks their receiving firm the right questions before getting started, they should avoid any significant roadblocks during the transfer.
By opening an online brokerage account with SoFi Invest®, you can take control of your financial portfolio with a DIY approach. You can trade stocks, exchange-traded funds (ETFs), fractional shares, and more with no commissions, all in the SoFi app.
FAQ
Can you transfer brokerage accounts?
It is generally possible to transfer a brokerage account from one broker to another. Transferring an account typically involves requesting a transfer form from your new broker and completing the transfer form and any other necessary documents.
How do you transfer stock to a family member?
To transfer stock to a family member, you will need to follow the steps for selling or transferring the stock following the policies of your brokerage firm. This may involve completing and submitting a stock transfer form or other required documentation to your broker and paying applicable fees.
What is an Automated Customer Account Transfer Service (ACATS)?
The Automated Customer Account Transfer Service (ACATS) is a system that facilitates the transfer of securities and cash between brokerage firms in the United States. It allows investors to transfer their accounts from one broker to another without manually selling and buying securities or transferring cash balances, which can streamline the process and minimize the risk of errors.
How will I know that my transfer is complete?
Once you have initiated the process of transferring your brokerage account from one broker to another, you should receive confirmation from both the current and new brokers when the transfer is complete. This confirmation may come in the form of a written statement or an email.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
SOIN1022013
Dec
22
2022
Sunroof vs Moonroof: How To Choose
Today, the term “sunroof” is typically used to refer to any panel or window in the roof of a vehicle that may pop up or slide open to allow air to circulate inside the cabin. A moonroof is a type of sunroof that features a stationary glass panel. There are many different sizes, shapes, and styles of sunroofs.
If you’re deciding which one to choose for a new car, we’ll share the differences and the pros and cons of each.
What Is a Sunroof?
“Sunroof” has become a generic term for any panel or window in a car’s roof. More specifically, a sunroof is usually a panel located on the top of a vehicle that slides back to reveal a window or opening in the roof. The panel is usually opaque, matching the vehicle’s body color. It can be electric or manual.
Sunroofs can come in sliding or pop-up versions. Sometimes, a sunroof’s panel can be completely removed.
What Is a Moonroof?
“Moonroof” is a term introduced in 1973 by a marketing manager at Ford. A moonroof is a type of sunroof, made of transparent glass. It may be stationary or slide back, but can’t be removed. New cars typically have moonroofs instead of sunroofs.
A “lamella” moonroof has multiple glass panels that slide back and provide a scenic view. A panoramic moonroof has fixed glass panels that cover most of the vehicle’s roof.
Moonroof vs Sunroof Differences
As mentioned above, a sunroof is typically a painted metal panel that blends into the rest of the car roof and that slides open or can be removed. A moonroof is essentially a window in the roof, whose glass panel may or may not slide open.
Recommended: Minimum Car Insurance Requirements
Pros and Cons of Sunroof
Sunroof pros: Opening the sunroof can give motorists a sense of being in a convertible without the expense. (Learn more about the costs associated with luxury vehicles.) A sunroof can make the interior space feel larger and keeps it well ventilated, reducing the need for AC. The opaque panel prevents the car from overheating on sunny days.
Sunroof cons: A sunroof can add weight to a vehicle and leave less headroom.
It can also be tempting for passengers — especially children — to extend their hands or head through the roof. However, manufacturers (and common sense) caution that it’s unsafe.
Although sunroofs add to a car’s value, they can also cost more to insure. (You can find out how much by shopping around on online insurance sites.) And the moving parts are vulnerable to jamming, which can lead to pricey repairs.
Attempts to retrofit a sunroof may not be successful, with leaks being the most common complaint. Factory-installed sunroofs are more reliable than ones using aftermarket parts.
Pros and Cons of Moonroof
Because a moonroof is a type of sunroof, most of the sunroof pros and cons above also apply to moonroofs. However, there are a few additional considerations:
Moonroof pros: In recent years, the moonroof has become more popular than the sunroof. Drivers appreciate how they allow sunlight in even when closed. Because there are no moving parts, a moonroof isn’t prone to mechanical problems.
Moonroofs typically come with a sliding sunshade inside, allowing people in the car to decide how much sun protection they’d like.
Moonroof cons: Because the glass absorbs heat, you may need to run your AC more on hot days.
Safety Considerations for Sunroofs and Moonroofs
As mentioned, it can be tempting to reach through or stand up in a vehicle with a sunroof or moonroof. For safety reasons, once the car is turned on, the driver and passengers should be seated and buckled.
Sunroofs and moonroofs also make a car more susceptible to break-ins, since there’s one more entry point for thieves to smash or pry open.
In case of a collision, there is additional risk of glass shattering, which can cause injury.
Recommended: How Much Does Car Insurance Go Up After an Accident?
Maintaining a Sunroof or Moonroof
Like any car feature, regular maintenance of your sunroof is recommended. And knowing how to DIY can help you save money on car maintenance. Mostly, that means keeping it clean. Here’s how:
1. First, use a hand brush to sweep debris off the roof.
2. Wipe down moving parts with a microfiber cloth.
3. Clean the glass with a product without ammonia or vinegar.
4. Lubricate moving parts with a lightweight automotive grease or WD-40.
How To Choose: Sunroof or Moonroof
When deciding between a moonroof and sunroof, consider your area’s climate and how much use you expect to get from the feature. It can also be helpful to ask friends or family who have experience with one or the other style for their opinions.
If money is a concern, a sunroof will cost $1,000-$1,500 more in a new car. Not having a sunroof will also lower your car insurance premiums.
In the end, it comes down to personal preference.
Recommended: How to Lower Car Insurance
The Takeaway
A sunroof refers to any opening or window in a car roof. A moonroof is a type of sunroof that usually features a stationary glass panel. There are many types, sizes, and styles of sunroofs, from electric to manual, pop-up to removable. Sunroofs will cost more upfront and possibly in maintenance fees and insurance. However, drivers and passengers will enjoy better light and air circulation, even without the air conditioner.
SoFi has partnered with Experian to provide you with rapid auto insurance quotes from top insurers. Comparing these quotes can help you find a great policy and save money. Experian will even help you close your old policy.
FAQ
Is a moonroof better than a sunroof?
Moonroofs do have advantages, including a lack of mechanical parts that require regular maintenance and can break down. Otherwise, it’s a matter of personal preference.
What are the disadvantages of a sunroof car?
A sunroof adds to the cost of the vehicle and likely to your insurance premiums. Sunroofs also make a car more vulnerable to break-ins and break-downs of mechanical parts.
Photo credit: iStock/AscentXmedia
Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOPT1122004
Dec
22
2022
How To Change Windshield Wipers on Your Car or Truck
Changing your windshield wipers helps keep you and others safe in low-visibility conditions, from rain and snow to dust and mud. It can also save you money on a service-station visit.
We’ll walk you through how and when to change your windshield wipers, and the types of wipers that are standard on older and newer cars.
Recommended: Does Auto Insurance Roadside Assistance Cover Keys Locked in a Car?
Can Anyone Replace Windshield Wipers?
Changing your windshield wipers may be one of the easiest DIY car-maintenance tasks. All you need is a needle-nose pliers and an old towel to protect the windshield. And wiper blades can be pretty inexpensive — as little as $12 per set.
Types of Wiper Blades
There are three main types of wiper blades to choose from, each with a different price point.
Standard
The most common type of wiper blades is the standard, where a rubber squeegee is held by a metal frame. The frame pivots to keep the squeegee angled properly against the windshield. You’ll find affordable standard wipers on most older cars.
Beam
The newer beam design features a solid piece of rubber serving as frame and squeegee. Instead of pivoting, the wiper is curved to maintain contact with the windshield. Without a metal frame, this wiper is less likely to get clogged with leaves or ice.
Beam wipers are more efficient and last longer. However, they’re also more expensive. Luxury vehicles tend to feature beam-style wipers because they’re seen as more sleek and modern.
Hybrid
This style of wiper has nothing to do with hybrid cars. The hybrid wiper has a metal frame, like the standard, but an updated blade design that’s more efficient. These wipers are priced between the low-cost standard and the higher-cost beam.
While some drivers may choose their wipers based on how much their car is worth (cheap car = cheap wipers), remember that safety is the most important factor.
Recommended: Insurance Tips for First-time Drivers
Getting Ready To Change Wiper Blades
The prep work is pretty simple, but we’ll break it down anyway.
If this type of project is up your alley, check out other ways to save on car maintenance.
Know Which Part of the Blade To Change
Standard windshield wipers contain three main parts: a lower wiper arm, a blade that connects to the arm, and a rubber liner that wipes off your windshield. It’s the rubber refill that typically needs to be changed. Beam-style wipers have only two parts: the arm and the rubber blade.
Measure the Blade You Have
Measure both of your wiper blades — the driver’s side and the passenger’s side may not be the same length.
Buy Replacement Blades
Many auto-parts store websites feature parts-finder tools that allow you to match the type of wiper to your make and model of car. At the auto-parts store, measure the replacements to make sure you’re getting the exact same size as what you currently have.
By the way, windshield wiper replacements aren’t covered by car insurance, nor do they count toward your insurance deductible.
Recommended: How To Lower Your Car Insurance
Installing New Wiper Blades
All it takes is three steps to remove the old wipers and insert the new ones.
Unhook the Old Wiper Blade
For standard wipers, gently pull the arm of the wiper away from the windshield glass. You may want to place a folded towel against the glass just in case you accidentally let the wiper go. Flip the rubber blade so it goes bottoms-up. Find the retaining clips near the end of the blade. Use pliers to pinch them together so you can slide out the blade.
Another style of connector is the J-hook, named for the J shape at the end of the blade. J-hooks have a tab that must be lifted or pushed to release the blade. Once released, pull the wiper down toward the base to remove it.
Insert the New Wiper
Slide the replacement blade into the same place where you just removed the old one. Make sure that the replacement blade is between the clips so they won’t scratch your windshield. Then make sure that the last clip clicks into place. Gently turn the arm back to its normal position, and release the arm of the blade.
Make sure to test your blades while parked. You don’t want an improperly attached blade flying off on a rainy day!
When To Change Wipers
There are a few reasons you might want to replace your windshield wipers. Consider keeping a pair of replacement blades in your trunk or garage so that you have them when you need them.
It’s recommended that you change both wipers at the same time, even if only one is giving you trouble. Now is a good time to check your wiper fluid as well.
How Often To Change Wipers
Experts recommend changing wiper blades every year. But it depends on what type you have and how hard they have to work. Inexpensive standard wipers should be replaced every six months. Beam-style blades last twice as long.
In regions with long, icy winters and/or dry, dusty summers, you may need to replace your blades more frequently. In balmier climates, every two years might be sufficient. To be on the safe side, you can proactively change them at predetermined intervals — possibly at the same time as your personal insurance planning check-in.
Cracked Wipers
Periodically check the wipers for cracks or tears, even if you haven’t noticed any problems. Also check to see if any small chunks are missing. You don’t want to wait till you’re driving in the rain to discover a problem.
Wipers Leaving Streaks
If your blades leave streaks, this likely means that they’ve outlived their useful life. If in doubt, change your blades.
Recommended: How to Calculate Expected Rate of Return
The Takeaway
Changing out windshield wipers is an easy maintenance task that anyone can handle. However, some auto-parts stores will install wipers for free with their purchase. Older cars tend to feature standard wipers, which have a metal frame holding a rubber blade. Newer cars commonly have one-piece, “beam-style” wipers. Beam wipers are more efficient and last longer, but are also more expensive. Standard wipers are less expensive but don’t last as long. It’s a good idea to change your wipers every six to 12 months — more if you live in an area with extreme winters.
Here’s another way to protect yourself behind the wheel: getting the right auto insurance. SoFi has partnered with Experian to use a blend of technology and human interaction to provide you with multiple insurance quotes from top insurers in just minutes.
FAQ
Can you replace a windshield wiper yourself?
This is one of the easiest car maintenance tasks, so yes. You can replace them yourself with just a pair of needle-nose pliers and a towel to protect your windshield.
Is it cheaper to replace windshield wipers yourself?
It can be. If you buy windshield blades online, they can be as low as $12-16 per set. In an auto-parts store, they can go for $23-38 per set or more — though some stores will install them for you free.
Is it easy to install wiper blades?
Fortunately, there are just a couple of simple steps involved to remove the blades and put new ones on. Although everyone defines “easy” differently, this is one of the more straightforward car maintenance tasks.
Photo credit: iStock/hxyume
Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOPT1122003
Dec
22
2022
What Is an Equal-Weighted Index? How to Calculate It
An equal-weight index gives each constituent the same weight in the index, versus a market-cap-weighted or price-weighted index, where bigger companies (or those trading at higher prices) hold a larger share of the index.
Equal weighting strives to equalize the impact of each company’s performance on the overall index. Traditional market-cap weighting tends to give bigger companies more influence over outcomes.
Equal-weight investing is a smart beta strategy that may appeal to certain types of investors more than others. This article will delve deep into equal-weight investing, including:
• What Is an Equal Weighted Index?
• How to Calculate an Equal Weighted Index.
• Advantages of Using an Equally Weighted Index.
• Disadvantages of Using an Equally Weighted Index.
What Is an Equal-Weighted Index?
A stock market index tracks the performance of a specific group of stocks or a particular sector of the market. For example, the S&P 500 Composite Stock Price Index tracks the movements of 500 companies that are recognized as leaders within their respective industries.
Stock market indices are often price-weighted or capitalization-weighted.
• In a price-weighted index, the stocks that have the highest share price carry the most weight. In a capitalization-weighted index, the stocks with the highest market capitalization carry the most weight.
• Market capitalization represents the value of a company as measured by multiplying the current share price by the total number of outstanding shares.
While some investors may wish to invest in stocks, others may be interested in mutual funds or index funds, which are like a container holding many stocks.
How Equal Weighting Works
An equal-weighted index is a stock market index that gives equal value to all the stocks that are included in it. In other words, each stock in the index has the same importance when determining the index’s value, regardless of whether the company is large or small, or how much shares are trading for.
An equally weighted index essentially puts all of the stocks included in the index on a level playing field when determining the value of the index. With a price-weighted or capitalization-weighted index, on the other hand, higher-priced stocks and larger companies tend to dominate the index’s makeup — and thereby dictate or influence the overall performance of that index.
This in turn influences the performance of corresponding index funds, which track that particular index. Because index funds mirror a benchmark index, they are considered a form of passive investing.
Most exchange traded funds (ETFs) are passive funds that also track an index. Now there are a growing number of actively managed ETFs. While equal-weight ETFs are considered a smart beta strategy, they aren’t fully passive or active in the traditional sense. These funds do track an index, but some active management is required to rebalance the fund and keep the constituents equally weighted.
Examples of Equal-Weight Funds
Equal-weight exchange-traded funds (ETFs) have grown more common as an increasing number of investors show interest in equal-weight funds. Equal weight falls under the umbrella of smart-beta strategies, which refers to any non-market-capitalization strategy.
The term “smart beta” doesn’t mean a particular strategy is better or more effective than others.
Equal-weight funds, for example, are designed to shift the weight of an index and its corresponding funds away from big cap players, which can unduly influence the performance of the index/fund. And while an equal-weight strategy may have improved fund performance in some instances, the results are inconsistent.
Here is a list of the top five equal-weight ETFs by assets under management (AUM), according to ETF.com.
1. Invesco S&P 500 Equal Weight ETF (RSP )
2. SPDR S&P Biotech (XBI )
3. SPDR S&P Oil and Gas Exploration and Production (XOP )
4. SPDR S&P Global Natural Resources ETF (GNR )
5. First Trust Cloud Computing ETF (SKYY )
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
How to Calculate Equal-Weighted Index
To calculate equal weighted index, you need to know two things:
• The share price of each stock that’s included in the index
• Total number of stocks included in the index
If you’re calculating an equally weighted index value for an index that has five stocks in it, each one would be weighted 20%, regardless of its stock price or market capitalization. To find an equal-weighted index value, you would simply add the share price of each stock together, then multiply it by the weight.
So for example, say an index has five stocks priced at $100, $50, $75, $90 and $85. Each one would be weighted at 20%.
Following the formula, you would add each stock’s price together for a total of $400. You’d then multiply that by the 20% weighting to arrive at an equal-weighted value of 80.
As fund turnover occurs and new assets are exchanged for old ones, or as share prices fluctuate, the equally weighted index value must be recalculated.
The equally weighted index formula can be used to determine the value of a particular index. You may want to do this when determining which index ETF to invest in or whether it makes sense to keep a particular index mutual fund in your portfolio.
Advantages of Using an Equally Weighted Index
An index investing strategy might be preferable if you lean toward more conservative investments or you simply want exposure to a broad market index without concentrating on a handful of stocks. That’s something you’re less likely to get with mutual funds or ETFs that follow a price-weighted or capitalization-weighted index.
Here are some of the reasons to consider an equal-weighted index approach:
• An equal-weight strategy can increase diversification in your portfolio while potentially minimizing exposure to risk.
• It’s relatively easy to construct an equally weighted portfolio using index mutual funds and ETFs.
• It may appeal to value investors, since there’s less room for overpriced stocks to be overweighted and undervalued stocks to be underweighted.
• Equal-weighted indices may potentially generate better or more incremental returns over time compared to price-weighted or capitalization-weighted indices, but there are no guarantees.
Disadvantages of Using Equally Weighted Index
While there are some pros to using an equal weighted approach, it may not always be the best choice depending on your investment goals. In terms of potential drawbacks, there are two big considerations to keep in mind:
• Equal-weighted index funds or ETFs that have a higher turnover rate may carry higher expenses for investors.
There is typically a constant buying and selling of assets that goes on behind the scenes to keep an equal-weighted mutual fund or ETF in balance.
Higher turnover ratios, i.e. how often assets in the fund are swapped in and out, can lead to higher expense ratios if a fund requires more active management. The expense ratio is the price you pay to own a mutual fund or ETF annually, expressed as a percentage of the fund’s assets. The higher the expense ratio, the more of your returns you hand back each year to cover the cost of owning a particular fund.
• Equal-weighted indices can also be problematic in bear market environments, which are characterized by an overall 20% decline in stock prices. During a recession, cap-weighted funds may outperform equal-weighted funds if the fund is being carried by a few stable, larger companies.
◦ Conversely, an equal-weighted index or fund may miss out on some of the gains when markets are strong and bigger companies outperform.
| Advantages | Disadvantages |
|---|---|
| Can increase diversification | Will typically have higher costs |
| Constructing an equal-weight portfolio is straightforward | May see outsize declines in bear markets |
| Equal-weight strategies may appeal to value investors | May not realize full market gains |
| Equal-weight strategies may perform better than traditional strategies, but there are no guarantees |
The Takeaway
In an equal-weight index, each stock counts equally toward the index’s value, regardless of whether the company is large or small, or what shares are currently trading for. The same is true of any corresponding fund.
There are advantages to investing in an equal-weight index fund over a capitalization-weighted index or price-weighted index. For example, equal-weighted indices may generate better or more consistent returns. Investing in an equal-weight index may be appealing to investors who prefer a value investing strategy or who want to diversify their portfolio to minimize risk.
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FAQ
How do equal-weight ETFs work?
Like an equal-weight index, an equal-weight ETF holds the same proportion of each of its constituents, which in theory may equalize the impact of different companies’ performance.
When should you buy equal-weighted ETFs?
If you’d like to invest in a certain sector, but you don’t want to be riding the coattails of the biggest companies in that sector because you see the value in other players, you may want to consider an equal-weight ETF.
What is the equally weighted index return?
The return of an equally weighted index would be captured by the performance of an investment in a corresponding index fund or ETF. So if you invest $100 in Equal Weight Fund A, which tracks an equal weight index, and the fund goes up or down by 5%, you would see a 5% gain or loss.
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