Hedging the Equal Weight (EW) S&P 500 Index

This article discusses how to combine S&P Index futures to create an effective hedge for the increasingly popular Equal Weighted S&P 500 Index. Any index that has achieved the broad market acceptance of the S&P 500 index is bound to become the basis of numerous popular variations. Accordingly, the Equal Weight (EW) S&P 500 index has attracted significant investor attention as evidenced by the $1.4 billion in assets under management in the Rydex EW S&P 500 ETF (Ticker: “RSP”). The EW S&P 500 index references the same constituents as the mainstream S&P 500 index. But while the stocks in the mainstream S&P 500 index are weighted by reference to market capitalization, the stocks in the EW index are weighted equivalently per a quarterly rebalancing procedure. As such, the least capitalized stock has an influence equivalent to the most heavily capitalized stock in the index. But can a market participant hedge or replicate the performance of the EW S&P 500 index using existing stock index futures? You will want to read this paper to find the answer.