The S&P 500 Equal-Weight Has Earned MORE than the Standard S&P 500 Despite the Recent Underperformance!

“Just stick to the largest companies.”

The ones making these comments may not have seen the data. Had they seen it, I wonder would they still how such a strong view.

The chart below comes from Value shop Lyrical Asset Management in a paper “Warning Signs”:

The bar charts show the annual calendar year performance of the market cap-weighted S&P 500 (Your CSPX, VOO and SPY) minus the S&P 500 Equal Weight Index. The equal-weighted index evenly distributes the portfolio across the 500 companies instead of letting the largest bobble to the top.

We notice firstly that there are quite a few negative bars, which indicates that there are many years the equal-weight index outperformed the capitalization-weighted S&P 500.

The chart below zoomed in and show us when the recent underperformance starts:

That’s probably 9 years ago. I didn’t realize it was that long. And that is long enough for a lot of new investors to have the idea that market-cap weighted tends to win out the equal-weighted index.

We can often consider the equal-weighted index to be a bias towards the smaller companies and this case, within the largest US companies.

Does the fundamentals substantiate this underperformance?

There are 3 chars above and the middle chart shows the difference in aggregate earnings per share of the last 12 months over this underperforming period.

You know… I was damn surprised the aggregate EPS for the equal-weighted index is actually higher during this period!

That means that despite all these talk of what mega-cap dominance, the fundamentals showed a very different picture. This middle chart is valuable to me because we don’t often see a source for the S&P 500 equal-weighted. We see that the gap was pretty narrow between the two index for a long time and started deviating in 2022.

The last chart shows the Price Earnings difference and if you felt the Market Cap Weighted Index is expensive, you might want to go Equal Weighted because it never got expensive.

After the Best 3-Month S&P 500 Market-Cap Outperformance

I always wonder if 30 is a small sample size and in this case, I felt that the following table of the periods where the S&P 500 outperform the equal-weight by a lot is not quite big:

The next one’s three- and five-year performance wasn’t great, but it was also quite clustered. Please note that this is not the S&P 500 market cap returns but the relative performance.

A Value Shop Will Eventually Need to Pimp Value…

This s the same table but if we compare against the cheapest quintile (20%) of the top 1,000 US Stocks:

The underperformance against the cheapest large-cap stocks look even worse.

Take a look at the data and truly reflect upon it.

I think one of the main underlying message is to not trust what you see over the last year, or two years as permanent.

If you zoom out, the data might moderate your lens and adjust your view points.

The Actual ETF Battle: SPY vs RSP

There are ETFs that started since the Aug 2004 period that allow us to see how is the actual performance over the past 20 years.

This is not just an academic exercise but actual performance:

The orange line shows the returns if you invest $1 million in the SPY ETF (market cap weighted) versus the RSP ETF (equal-weighted).

For a long while the equal-weighted has dominated and it is actually the market cap weighted that is doing the catching up.

The lesson here is not which is better than which but to realize that there are ebbs and flows to this.

There is a UCITS S&P 500 Equal Weight ETF

I tried to see if there is a tax efficient ETF for you to invest if you wish to express this tactical or strategic allocation idea.

Turns out there is the iShares S&P 500 Equal Weight UCITS ETF or EWSP.

This is an Aug 2022 incorporated ETF that is domiciled in Ireland. It has a 20 basis point annual expense ratio and the current AUM is about US $1.5 billion.

Current PE ratio for the group of companies is 21 times compared to 27 times for CSPX.

You can purchase EWSP through Interactive Brokers.

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