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EQUAL WEIGHTING

Except for the Dow Jones Industrials, almost all the major market averages are capitalization-weighted. In practice, the daily impact of a stock's price change upon a market index is weighted by multiplying its price by the number of shares outstanding. The result is that a handful of large-cap stocks will exert the most influence on the index. For example, in 2005, the top 10 (2%) of S&P 500 stocks accounted for 20% of the total market cap of the index. As such, the idea that investing in an S&P 500 Index fund diversifies your portfolio over 500 stocks is misguided.

The S&P Equal Weight Index (SPEWI) is the equal-weighted version of the widely regarded S&P 500. The index has the same constituents as the capitalization weighted S&P 500, but each company in the S&P EWI is allocated a fixed weight of 0.20% and is rebalanced quarterly. As the stock prices move, the weightings in the index will change. A more frequent rebalancing would result in higher index turnover; and less frequent rebalancing will result in significant deviations from the ideal of equal weights.

This different approach is important because an equal weighted index: (1) provides true diversification; (2) is not performance-skewed to the ups and downs of a handful of large cap stocks; and (3) has historically out-performed the cap-weighted version.

When it was first introduced in 2003, Standard and Poors provided historical backtesting for the SPEWI vis-¨¤-vis the S&P 500; it was shown to have outperformed the traditional index for all timeframes, that is, one year, three year, five year, ten year and since January 1990. Most recent seven year compound returns for the SPEWI are 10.7% vs. 4.3% for the S&P 500 Index.

The ¡°Grandfather of Unweighted Indices¡±, the Value Line Arithmetic Index, began by being set equally to its counterpart, the Value Line Geometric Index, which is capitalization weighted for the 1600 or so stocks it contains. At that time in the late 80¡¯s, the value of both indices was 210.75.

As of December 30, 2005, the Arithmetic Index was 1916 and the Geometric Index was 412.

These two examples present the strongest case for utilizing an equal weighting approach to maximize gains in any investor¡¯s portfolio.

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