Understanding Equally Weighted Indexes: Calculation & Benefits

Equally weighted indexes make it easy to total gains and losses.

An index contains multiple securities, such as stocks and bonds. If you invest by following an index, you buy the same securities the index holds. Whether you invest through an exchange-traded fund or through individual purchases, you'll see that some holdings do better than others. An equally weighted index holds the same dollar amount of each security, making it easy for you to track performance.

Percentage Gain or Loss

You can calculate the percentage each security gains or loses. For example, a three-stock index might have stock XYZ that gained 10 percent, ABC may have lost 5 percent, and DEF may have gained 3 percent. If your index is equally weighted, you started out with the same dollar amount in each stock. Therefore, you can simply add up the percentages and that is your total return. In the example, you would have plus 10 percent, minus 5 percent and plus 3 percent. Your total return would be 8 percent.

Dollar Amounts

You can use actual dollars instead of percentages. You add and subtract your dollar gains and losses. If one stock made $100, another lost $50, and yet another made $25, 100-50+25 equals 75. You made $75 on your combined investment in the index.