Weighted Average Market Capitalization
Candlefocus EditorIn a Weighted Average Market Capitalization index, the bigger companies with higher market cap have a greater weighting and influence than smaller companies with smaller market cap. This means that their performance has more influence on the index than the performance of smaller companies. The resulting index is seen as being both stable, and reflective of the broader market, as it is likely to incorporate the large companies that have the greatest influence in the market.
On the other hand, if there is a rally in small-cap stocks, the index investors won’t benefit as much as they would if the index were equal-weighted, as the index will not be properly reflecting the performance of the market unless the small-caps start to out-perform the large-caps. Therefore, if the goal of an investor is to benefit more from small-cap stocks, a different type of index should be chosen that is more equally weighted.
In conclusion, a Weighted Average Market Capitalization index can be a good choice for investors who are looking for stability and want to track the performance of the broader market, as the index will reflect the performance of the biggest companies with the largest market cap. However, if small-caps have higher potential or an investor is bullish on the sector, a different index might be more appropriate.