S&P Index: Equal Weighting Versus Market Cap Weighting
A pretty interesting analysis in this story by Bloomberg. As many know by now we’ve experienced a ‘lost decade’ (actually a bit longer now) in U.S. stocks as measured by the most popular of indexes, such as the S&P 500 (NYSEARCA:SPY). However, that index is market weighted meaning the impact of an ExxonMobil (NYSE:XOM) is far greater than the companies in slots 490-500. But, if you had equal weighted all 500 stocks, returns would have been solid, if not spectacular, at +66%. Leading to the question of why someone has not created an equal weight S&P 500 ETF– reader says there is such a product – symbol: RSP.Of course this makes sense from the aspect that over the long run, there are limits to growth prospectus – outside of extreme examples like Apple (NASDAQ:AAPL), it simply is harder to grow once you hit massive scale. Hence gains in small or mid caps “should” outperform large caps in the “very long run”. Specific to the 00’s, after a huge run in stock prices in the latter 90s – especially in the tech space – many large cap company stocks have been especially stagnant as they gave back/digested the big moves a decade+ ago.
- Even with the Standard & Poor’s 500 Index down 19 percent since the bursting of the technology bubble in 2000, it’s been no lost decade for stocks.
- The benchmark gauge for American common equity climbed 66 percent from March 24, 2000, through Dec. 2, after stripping out adjustments for market value, which gives equal credit to Exxon Mobil Corp. (NYSE:XOM), whose shares are worth $382.5 billion, and Monster Worldwide Inc. (NYSE:MWW), at $945.6 million.
- That’s little help for most investors, whose returns reflect the capitalization-weighted index, says Cliff Asness at AQR Capital Management LLC. Gains in the equal-weighted index reflect appreciation in its smaller companies and stocks with lower valuations over the past decade, according to Asness, who helps oversee $38.8 billion as founder and president of the AQR hedge fund in Greenwich, Connecticut.
- Gains in the S&P 500 Equal Weighted Index through the dot- com tumble, the Sept. 11 attacks, the real-estate collapse and the worst financial crisis since the Great Depression show the resilience of U.S. companies that are forecast to report record earnings this year even as Europe’s debt crisis threatens growth again.
- “Corporate America repaired itself,” Chris Hyzy, the New York-based chief investment officer at U.S. Trust Co., which oversees about $360 billion, said in a phone interview on Dec. 1. “On an equal-weighted basis, it hasn’t been a lost decade.”
- Owners of stocks in the S&P 100 suffered the most since March 24, 2000. The index fell 33 percent, driven by declines of 70 percent or more in Cisco Systems Inc. (NASDAQ:CSCO) and General Electric Co. (NYSE:GE), the second- and third-largest companies behind Microsoft Corp. (NASDAQ:MSFT) at the peak of the technology bubble.
- Equities suffered two bear markets lasting longer than a year in the previous decade. The first began after the S&P 500’s price-earnings ratio reached 31.2 following the 1990s rally led by computer and software makers. The second started in 2007 as global bank losses from subprime mortgages spiraled toward $2 trillion. The gauge doubled in five years starting in October 2002 as energy companies rallied 242 percent as a group and raw- material producers jumped 162 percent.
- Energy producers climbed 149 percent in the past decade.
- Companies in the S&P 500 are poised to report record earnings of $99.05 a share for 2011.
- Smaller companies lifted the S&P 500 Equal Weighted Index to a record on May 10, almost four years after the capitalization-based gauge reached its all-time high of 1,565.15 in October 2007.
- The Russell 2000 Index (RTY), a gauge of small-cap shares with an average market value of $667.8 million, peaked on April 29 and is up 28 percent since March 24, 2000. The relative performance of smaller stocks doesn’t help the majority of investors. More than $5.58 trillion is benchmarked to the S&P 500 and about $1.31 trillion is directly linked to its value, according to an estimate by New York-based S&P.
- The biggest 100 companies make up 63 percent of the value of the S&P 500 and almost half of the entire American market.
Trader Mark is the author of Fund My Mutual Fund.