S&P 500 Equal weight, not market cap

[gcgang]

http://index.fund/wp-content/uploads/2015/04/Index-Funds-SP500-Equal-Weight-No-Load-Fact-Sheet.pdf

I just read an article that said equal weighting the stocks in the S&P 500 has outperformed the market cap S&P 500 by as much as 2.8% per year over a long period of time.

The reasoning made sense to me - lower valuations and selling stocks that have run up to buy those that have lagged (contrarian approach).

The article mentioned the above fund, INDEX. Are there other funds that do this? Do you think this approach makes sense?

 

[DrBrisket]

The article mentioned the above fund, INDEX. Are there other funds that do this? Do you think this approach makes sense?

RSP is an ETF that implements the equal weight S&P 500 index.

Does it make sense? Probably.

Is it a free lunch? No. There are long periods of underperformance relative to the market cap weighted index. Expense ratios are higher due to the need to continually rebalance an EW fund. This also means larger tracking errors are likely relative to Market Cap weighted funds.

If you will search my prior posts, there’s a link to an article that shows when EW tends to outperform Cap Weighted. Short version: over the long-term.

Also, there may be lower cost ways to get similar performance: linky.

 

[numbercrunch]

http://index.fund/wp-content/uploads/2015/04/Index-Funds-SP500-Equal-Weight-No-Load-Fact-Sheet.pdf



I just read an article that said equal weighting the stocks in the S&P 500 has outperformed the market cap S&P 500 by as much as 2.8% per year over a long period of time.



The reasoning made sense to me - lower valuations and selling stocks that have run up to buy those that have lagged (contrarian approach).



The article mentioned the above fund, INDEX. Are there other funds that do this? Do you think this approach makes sense?

I still can’t wrap my head around the concepts of equal weight vs market weight.

If I had enough cash to buy one share each of all the companies named in the S&P 500, at the opening market price today, would that group be considered market weight?

 

[gcgang]

I still can’t wrap my head around the concepts of equal weight vs market weight.

If I had enough cash to buy one share each of all the companies named in the S&P 500, at the opening market price today, would that group be considered market weight?

No. Price per share isn't the main thing. It's the total market capitalization of the company. If Apple's market cap is 5% of total S&P500 market capitalization, you'd need to put 5% of your investment in Apple. Whatever a company's market capitalization divided by total S&P market capitalization is what percent of your total investment you'd invest in each company.

I think the article said the 15 biggest companies (15/500=3%) makes up 25% of the S&P 500 market capitalization. If you used equal weight, the 15 biggest companies would only make up 3% of your investment. You'd put equal dollar amount (0.2% or 1/500 of your total investment) into each company.

 

[numbercrunch]

No. Price per share isn't the main thing. It's the total market capitalization of the company. If Apple's market cap is 5% of total S&P500 market capitalization, you'd need to put 5% of your investment in Apple. Whatever a company's market capitalization divided by total S&P market capitalization is what percent of your total investment you'd invest in each company.

I think the article said the 15 biggest companies (15/500=3%) makes up 25% of the S&P 500 market capitalization. If you used equal weight, the 15 biggest companies would only make up 3% of your investment. You'd put equal dollar amount (0.2% or 1/500 of your total investment) into each company.

Thanks, gcgang, that makes sense. I missed the concept of Market Capitalization being the determinant of market weighting, rather than share price alone.

 

[Lsbcal]

http://index.fund/wp-content/uploads/2015/04/Index-Funds-SP500-Equal-Weight-No-Load-Fact-Sheet.pdf

I just read an article that said equal weighting the stocks in the S&P 500 has outperformed the market cap S&P 500 by as much as 2.8% per year over a long period of time.

The reasoning made sense to me - lower valuations and selling stocks that have run up to buy those that have lagged (contrarian approach).

The article mentioned the above fund, INDEX. Are there other funds that do this? Do you think this approach makes sense?

Apparently that fund INDEX has not been around very long. Here is a chart from Morningstar comparing it to VFIAX (Vanguard 500 Index Admiral). As you can see VFIAX outperformed in this time period:

 

[mpeirce]

I just read an article that said equal weighting the stocks in the S&P 500 has outperformed the market cap S&P 500 by as much as 2.8% per year over a long period of time.

There are a number of alternate weights that outperform the total market (at least over various intervals).

The logic I see in investing in the Total Market index is that this is a very good stand in for the whole "US economy".

I'm done studying various market sectors or other slices of the economy and trying to find an advantage. I'm retired!

I do have confidence in the US economy and expect to it to continue to perform very well over the next half century (roughly my extreme best case scenario). That's why I am invested in the Total Market.

 

[FIRE'd@51]

An equally-weighted S&P 500 is more risky than the market cap-weighted S&P 500, because it gives more weight to the smaller, higher beta stocks relative to the larger ones. I doubt if those results were risk-adjusted that the conclusion would be the same. That is, the 2% per year is not really alpha, just the reward for holding a more risky portfolio.

 

[OldShooter]

With the investing crowd, including pension funds, deserting the stock pickers en masse for cap-weighted indexing, the hucksters are desperately trying to find some kind of magic by which to lure them back.

The general strategy is to tout indexing, but to sell it with a spin and with higher fees. Equal weighting is one idea. Others are called "smart beta," "factor-based", etc. Objectively speaking, the jury is out on these ideas because they haven't been around long enough and they haven't gone through enough market cycles to prove themselves.

Any one you look at, though, will show you very positive-looking backtests. With enough mucking around to tune the strategy and with careful picking of benchmarks and calendar periods, any huckster with an IQ above room temperature will be able to show an attractive backtest. Basically IMO they are meaningless.

So, picking one of these better-than-market-cap funds at this point is really a roll of the dice. Any investment is a roll of the dice to some extent of course, but personally I am satisfied that cap-weighted indexing, with its decades-long record of success, is good enough for me.

 

[VanWinkle]

With the investing crowd, including pension funds, deserting the stock pickers en masse for cap-weighted indexing, the hucksters are desperately trying to find some kind of magic by which to lure them back.

The general strategy is to tout indexing, but to sell it with a spin and with higher fees. Equal weighting is one idea. Others are called "smart beta," "factor-based", etc. Objectively speaking, the jury is out on these ideas because they haven't been around long enough and they haven't gone through enough market cycles to prove themselves.

Any one you look at, though, will show you very positive-looking backtests. With enough mucking around to tune the strategy and with careful picking of benchmarks and calendar periods, any huckster with an IQ above room temperature will be able to show an attractive backtest. Basically IMO they are meaningless.

So, picking one of these better-than-market-cap funds at this point is really a roll of the dice. Any investment is a roll of the dice to some extent of course, but personally I am satisfied that cap-weighted indexing, with its decades-long record of success, is good enough for me.

Amen!!

 

[Oz investor]

http://index.fund/wp-content/uploads/2015/04/Index-Funds-SP500-Equal-Weight-No-Load-Fact-Sheet.pdf

I just read an article that said equal weighting the stocks in the S&P 500 has outperformed the market cap S&P 500 by as much as 2.8% per year over a long period of time.

The reasoning made sense to me - lower valuations and selling stocks that have run up to buy those that have lagged (contrarian approach).

The article mentioned the above fund, INDEX. Are there other funds that do this? Do you think this approach makes sense?

i had researched an Australian version of the same concept ASX ticker code MVW

the re-balancing is done two monthly , so is locking in quick gains in volatility ( but of course risking extra trading costs )

the Australian ETF selects 89 shares from the 200 in the targeted index ( NOT the full index ) so some stock selection + a contrarian approach .

the next question that comes to mind .. is timing the market any advantage , or would dividend harvesting be a superior path ( buying cum-div, )

cheers

 

[Oz investor]

PS .. in Australian several of the highest market cap stocks are showing stress ( and NOT just from a judicial inquiry ) so the lesser lights might have moments of sunshine .

an extra question is with those short term gains locked in , do those gains compound effectively over time via the DRP like an index fund does

again the local version is relatively new , so hasn't a decent track record