Capitalization weighted or equal weighted?
Tofuzzy
Most portfolios that use indexing will have a fund or exchange-traded fund that tracks the S&P Index. In fact, the S&P 500 has put together a strong move since March, but not all the stocks in the index have performed as well. During a downturn, it tends to be the smaller companies that lead the way out of the darkness, and that is proving true again. The largest companies, the mega caps, have actually lagged as a group.
While there are 500 companies in the Index, it gives much greater representation to the largest of the large-capitalization companies, so they influence its performance the most. The largest 50 companies currently represent 52.0% of the S&P 500’s performance. However, when the 500 companies in the Index are put on the same footing, we get a different view of the S&P 500.
The S&P 500 Equal Weighted Index, which gives all 500 companies equal representation and doesn’t favor the mega cap stocks, has significantly outperformed since the mid-March low, rising 50.2% at close last Friday, versus a gain of 34.0% that day for the S&P 500.
The contrast in performance doesn’t stop there, however. The Equal Weighted Index has outperformed for more than 10 years! It has risen 31.0% since 1998 while the S&P 500 has declined 7.0%.
Granted, even though these indexes include the same stocks, they are totally different animals. They have different earnings growth characteristics, price-to-earnings ratios, levels of volatility, and risk profiles. Typically, the Equal Weighted Index tends to be higher in all of these measures.
In the current environment when the stock market is trading in anticipation of an economic recovery, the S&P 500 Equal Weighted Index will continue to get more traction in the near- and mid-term. For investors who would like to track the S&P 500 Equal Weighted Index, there is an exchange-traded fund that attempts to mimic its performance: the Rydex S&P Equal Weight ETF (ticker symbol RSP).
Check it out for yourself. Compare RSP to SPY, which tracks the regular S&P Index. (You can compare the charts on the Yahoo Finance page.) The contrast is stark!
June 1, 2009 • 12:13 PM
From www.womenwithportfolio.com
Take the road less traveled. It will make all the difference.
