They hold the same constituents except in variegated weights.
TheĀ Nifty 50Ā is your traditional market cap-weighted alphabetize where each stock is allocated a weight in proportion of its free-float market cap. So HDFC Bank, without its merger with HDFC Ltd finance for scrutinizingly 14%, Reliance Industries nearly 10% and so on.
The Nifty 50 Equal Weight is an volitional weighting strategy. It includes the same 50 companies, except weighted equally. Weights are reset to equal-weight every quarter.
Same constituents but significantly variegated weights. Which one, the Nifty 50 or Nifty 5 Equal Weight has washed-up largest over the years?
If one had to guess, intuitively, it’d be the market cap weighted Nifty 50 given successful mega caps automatically get a higher allocation.
Capitalmind found the comparative data had interesting things to say.
Chart shows the Nifty 50 and Nifty 50 Equal Weight probity curve
Nifty Equal Weight has washed-up largest in 15 of 24 timetable years. This is Total Returns.
Drawdowns on the market cap and equal-weight versions are not too different.
One and Three-year rolling returns indicate Equal Weight does largest in out and out manful markets (e.g. 2004 – 07) and worse in indifferent years (e.g. 2018 – 20)
The table summarises the comparison:
Overall Comparison Summary of Nifty 50 vs. Nifty 50 Equal Weight from June 1999 to Sep 2023 shows Equal Weight superiority on all metrics.
A few things to consider surpassing ditching the market-cap weighted Nifty50 for its Equal Weight variant:
- History says Equal Weight tends to do largest in roaring manful markets i.e. when most stocks rise and lags in indifferent or sideways markets. Intuitive considering the largest by market cap companies tend to be dominant in their respective sectors and not affected as much
- There are several funds and ETFs that offer exposure to the Nifty50 but only two (as of writing this) that offer exposure to the Nifty50 Equal Weight.
- The impact of the market cap weighting cuts both ways, When the handful of those companies do well, the Nifty handily outperforms the Equal Weight. Historically, most investment managers have struggled to write-up the traditional market-cap weighted benchmark alphabetize for this reason.
Picking the Equal Weight over the Nifty 50 is like valuables the underdog. But then, who doesn’t love an underdog story?
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