Three ETFs That Refuse to Rank Stocks by Size. Each Picks Winners a Different Way

Most index funds hand the biggest companies the biggest stakes, but three ETFs tear up that rulebook and each uses a completely different formula to decide who wins a spot and how much of your money they get.

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In a standard S&P 500 index fund, you own most of whichever company is worth the most. That’s market-cap weighting: each company’s slice of the fund is set by its market value, meaning its share price times all of its shares. The biggest names get the biggest slices.

Three large-company ETFs drop that rule: the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP), the Pacer US Cash Cows 100 ETF (CBOE:COWZ), and the VanEck Morningstar Wide Moat ETF (CBOE:MOAT).

Equal Weight Hands Every S&P 500 Company the Same Slice

As its name says, RSP applies equal weighting to the S&P 500. Every company in the index gets the same slice, whatever its size.

In practice, you own far less of the giants and far more of the smaller members than a standard fund would give you. RSP leaves the membership list to the S&P 500 index and changes only how the weights are assigned.

COWZ Lets a Cash Flow Formula Choose Its Stocks

COWZ screens the Russell 1000 for the top 100 companies by free cash flow yield. Free cash flow is the cash a business has left after paying for its operations and equipment. Pacer defines the yield as free cash flow divided by enterprise value (a company’s market value plus its debt, minus its cash).

The screen excludes financial companies and any company with negative projected free cash flow based on analyst consensus estimates. Pacer ETFs then weights the remaining companies by trailing twelve-month free cash flow, calculated as operating cash flow minus capital expenditures.

Averytin News Financial update.