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The Nifty 100 Equal Weight Index has had a strong run in the last six months, delivering 21.3 per cent against Nifty 100's 14.7 per cent as of June 30, 2024.
Before we understand the equal weight index's reason for outperformance, let's understand what it is. Like the Nifty 100 Index, the Nifty 100 Equal Weight index is home to the top 100 large-cap companies. Each constituent is allocated a fixed equal weight when rebalancing. This means each company has a 1 per cent weight in the index. To maintain this fixed weight, the index purchases the relatively underperforming stocks and sells the winning stocks.
Coming back to Nifty 100 Equal Weight Index's stellar six-month run, that is primarily due to stocks accounting for over 52 per cent of the index's weightage have delivered more than 20 per cent returns—doubly high compared to typical market returns of 10-12 per cent. Only 41 per cent of stocks in Nifty 100 could do the same.
In fact, the equal weight (EW) index has outperformed Nifty 100 based on average five- and 10-year rolling returns in the last 10 years. Additionally, both indices show a standard deviation of 21 per cent over 20 years, indicating they both have similar levels of volatility.
Historical performance
| Particular | Nifty 100 (%) | Nifty 100 Equal Weight (%) |
|---|---|---|
| Average 5-year returns | 12.9 | 13.4 |
| Average 10-year returns | 12.8 | 13.4 |
| Standard deviation over 20 years | 21 | 21 |
| Returns during Global Financial Crisis (GFC) | -44.8 | -47.1 |
| Returns during Covid pandemic | -28.6 | -28.9 |
| GFC covers the period from December 31, 2007 to March 31, 2009. The Covid pandemic covers from December 31, 2019 to March 31, 2020. Average returns are based on daily five-year and 10-year daily returns between 2004 and 2024. | ||
On closer inspection, we gleaned two further points during our number-crunching:
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The EW index has outperformed the Nifty 100 in all market conditions over the last five years.
- It only has a slight edge in a normal and bearish phase over a 10-year period. However, in a booming market, the EW index has beaten its counterpart 90 per cent of the time.
Performance in different market conditions
| Years | Index | Below average market returns (10 per cent) | Average market returns (10-20 per cent) | Above average market returns (>20 per cent) |
|---|---|---|---|---|
| 5 years | Nifty 100 Equal Weight Index | 64% | 58% | 99% |
| 5 years | Nifty 100 | 36% | 42% | 1% |
| 10 years | Nifty 100 Equal Weight Index | 52% | 53% | 90% |
| 10 years | Nifty 100 | 48% | 47% | 10% |
| Based on daily five-year and 10-year rolling returns over the last decade. Source: NSE. | ||||
Our take
The Nifty 100 Equal Weight Index has not only outperformed the Nifty 100 over six months and five years, it has been marginally ahead over 10 years, too. What's more, it offers better diversification and similar levels of volatility.
Therefore, all things considered, funds that track the Nifty 100 Equal Weight Index are at least worthy of consideration.
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