{"id":2762,"date":"2021-08-19T20:41:17","date_gmt":"2021-08-19T20:41:17","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2762"},"modified":"2021-08-19T20:48:34","modified_gmt":"2021-08-19T20:48:34","slug":"cap-weighted-vs-equally-weighted-sp-500-etfs-which-is-better","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/cap-weighted-vs-equally-weighted-sp-500-etfs-which-is-better\/","title":{"rendered":"Cap-Weighted vs. Equally Weighted S&P 500 ETFs \u2013 Which is Better?"},"content":{"rendered":"

By Herb Blank<\/p>\n

Research Affiliates and Dimensional Fund Advisors have been among the esteemed research and investment firms proclaiming that equally weighted portfolios will deliver superior performance to portfolios weighted by market capitalization also known as cap-weighted. This article explores to what extent that has been true in recent years.<\/span><\/span><\/span><\/p>\n

IVV<\/strong> is the iShares S&P 500 Index ETF. RSP<\/strong>, part of the INVESCO family, is an ETF holding the identical 500 stocks but with equally weighted positions. We begin our comparison January 1, 2004, the first full year that RSP was in existence and complete the analysis with the end-of-day prices of the ETFs on June 30, 2021. For an investor, these numbers reflect realizable returns. Indexes themselves are not directly accessible, so these ETFs are used instead.<\/span><\/span><\/span><\/p>\n

All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated on\u00a0www.ValuEngine.com<\/a><\/strong><\/h5>\n
Free Two Week Trial to all 5,000 plus equities and ETFs covered by ValuEngine\u00a0HERE<\/a><\/strong><\/h5>\n

Here is a table with the comparison in compound annualized growth rates (CAGR)<\/span><\/span><\/span><\/p>\n\n\n\n\n\n\n\n\n
<\/td>\nIVV<\/span><\/span><\/td>\nRSP<\/span><\/span><\/td>\n<\/tr>\n
Since Jan 1, 2004- 17.5 years<\/span><\/span><\/td>\n\n

10.17%<\/span><\/span><\/p>\n<\/td>\n

\n

10.41%<\/b><\/span><\/span><\/p>\n<\/td>\n<\/tr>\n

6\/2011 – 6\/ 2021, 10 years<\/span><\/span><\/td>\n\n

15.29%<\/b><\/span><\/span><\/p>\n<\/td>\n

\n

13.86%<\/span><\/span><\/p>\n<\/td>\n<\/tr>\n

6\/2016 – 6\/2021, 5 years<\/span><\/span><\/td>\n\n

17.45%<\/b><\/span><\/span><\/p>\n<\/td>\n

\n

14.59%<\/span><\/span><\/p>\n<\/td>\n<\/tr>\n

6\/2018 – 6\/2021, 3 years<\/span><\/span><\/td>\n\n

18.34%<\/b><\/span><\/span><\/p>\n<\/td>\n

\n

15.17%<\/span><\/span><\/p>\n<\/td>\n<\/tr>\n

6\/2020 – 6\/2021, 1 year<\/span><\/span><\/td>\n\n

37.18%<\/span><\/span><\/p>\n<\/td>\n

\n

43.98%<\/b><\/span><\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

All ValuEngine ETF reports updated and available:\u00a0Click HERE<\/a><\/strong><\/p>\n

So, using S&P 500 stocks, we can see that the equally weighted RSP outperformed by a small amount, 24\/100 of a percent or 24 basis points since January 1, 2004. RSP outperformed by a much larger amount in the last 12 months ending June 30, 2020 when value stocks came dramatically back in favor. Out-performance by equally weighted portfolios, however, is not a given. In 10-, 5- and 3-year annualized performance, cap-weighted IVV outperformed equally weighted RSP significantly. <\/span><\/span><\/span><\/p>\n

Let\u2019s take a look at the growth of $10,000 invested January 1, 2004 through June 30, 2021 illustrated in the following graph. RSP, the ETF owning the equally weighted S&P, grew to $57,012 as compared with $54,886 for IVV, a difference of $2,126 or $172 per year. On the other hand, RSP also had higher volatility and the higher maximum drawdown during the period.<\/span><\/span><\/span><\/p>\n

Another problem many investors have with the S&P 500 is concentration risk. The top 10 holding of IVV constitute 27.5% of the portfolio. Moreover, five of the top seven holdings are in the Computer and Technology Industry. This includes Apple, Microsoft, Facebook, Alphabet (Google\u2019s parent) and Nvidia. The remaining two, Amazon and Tesla, have been called \u201ctech companies in disguise\u201d by a noted market pundit. When you consider that Amazon Web Services has accounted for more than 50% of Amazon\u2019s revenues in recent years and Tesla\u2019s focus on being a pioneer in developing new technologies, it\u2019s easy to understand why. With 25% of the total weight in seven tech-dominated companies, it\u2019s no wonder many strategists feel that a second tech bubble bursting would damage the S&P 500 more than most equally weighted portfolios. <\/span><\/span><\/span><\/p>\n

There are no such concentration concerns for holders of equally weighted RSP. At quarterly rebalancing and reconstitution, each of its 500 holdings account for 0.20% of the portfolio. Between those times, weights drift with market movements. As of the morning of August 16, its top five holdings were: Paycom Software (0.28%); Albemarle Corp (0,28%); Chipotle (0.27%); Monolithic Power (0.26%) and MSCI (0.26%). The top 10 holdings constituted 2.6% of the portfolio. RSP\u2019s industry sectors are also far more diversified with Computers and Technology constituting less than 16% of its weight as compared with greater than 32% for IVV. In the past 10 years, the much higher exposure to technology has helped ETFs following the S&P 500 post superior return. But another term for exposure is risk. Therefore, if tech should plummet for an unspecified period relative to the remainder of the market, IVV would plummet further than RSP would. <\/span><\/span><\/span><\/p>\n

A frequent question is \u201cWhat about the Dow Jones Industrial Average (\u201cthe Dow\u201d) that calls itself \u201cThe Market\u2019s Measure”. Its price history that can be tracked for more than 100 years. Many feel that the methodology, holding positions indefinitely with no set rebalancing periods and low historic turnover is much more reflective of how they manage portfolios than IVV or RSP. The Dow can be accessed through DIA<\/strong>, originally called Diamonds, a SPDR product managed by State Street Global Advisors (\u201cSSgA\u201d). <\/span><\/span><\/span><\/p>\n

Institutional portfolio measurement professionals and the Certified Financial Analysts Society agree that in the modern stock market era, a committee-selected aggregation of 30-stocks is insufficient to represent the performance of the 6,000-plus company stock market. Worse, average uses price-per-share as the numerator to determine weight while stock splits are accounted for only in the denominator to keep the magnitude of the indicator consistent. At best, the Dow is still a somewhat useful daily indicator. Its direction, up or down, agrees with that of the S&P 500 an average of 4.3 days out of 5. Mathematically, it is not truly an index with a common base. Beyond that, considerations for removal and replacement have changed over time, something which affects a small collection of stocks more than a large one. As an investment portfolio, the weighting system that implicitly lowers the percentage of a holding that splits has no empirical support or investment rationale. Managing such a portfolio requires more trades, generally via customized contribution baskets to prevent capital gains, than a standard market-cap-weighted portfolio. <\/span><\/span><\/span><\/p>\n

Despite these myriad reasons serious investors should ignore the Dow, it is still \u201cthe market\u201d in the eyes of the majority of investors. Therefore, I include it in the remaining analytic charts and tables. Using the same growth of a $10,000 investment in 2004 methodology, a DIA investment would have grown to $49,990, about $7,000 less than an investment in RSP and $5,000 less than IVV. From this graph, DIA appears to track RSP a bit more closely than IVV. <\/span><\/span><\/span><\/p>\n

This shows pertinent statistic for each ETF. Most of the data are from ValuEngine reports dated August 16, 2021. Provider Fact Sheets used to fill in.<\/span><\/span><\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
<\/td>\nRSP<\/b><\/span><\/span><\/span><\/td>\nDIA<\/b><\/span><\/span><\/span><\/td>\nIVV<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
ValuEngine Rating<\/span><\/span><\/span><\/td>\n\n

3<\/span><\/span><\/p>\n<\/td>\n

\n

3<\/span><\/span><\/span><\/p>\n<\/td>\n

\n

3<\/span><\/span><\/span><\/p>\n<\/td>\n<\/tr>\n

1-Yr Forecast Return<\/span><\/span><\/span><\/td>\n-4.4%<\/span><\/span><\/span><\/td>\n-4.0<\/span><\/span><\/span><\/td>\n-3.7%<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
1-Yr Historical Return <\/span><\/span><\/span><\/td>\n40.4%<\/b><\/span><\/span><\/span><\/td>\n27.2%<\/span><\/span><\/span><\/td>\n32.4%<\/span><\/span><\/span><\/td>\n<\/tr>\n
3-Yr Historical Return<\/span><\/span><\/span><\/td>\n15.5%<\/span><\/span><\/span><\/td>\n13.6%<\/span><\/span><\/span><\/td>\n18.3%<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
5-Yr Historical Return<\/span><\/span><\/span><\/td>\n12.6%<\/span><\/span><\/span><\/td>\n13.1%<\/span><\/span><\/span><\/td>\n14.3%<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
10-Yr Historical Return<\/span><\/span><\/span><\/td>\n14.0%<\/span><\/span><\/span><\/td>\n13.7%<\/span><\/span><\/span><\/td>\n15.4%<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
Volatility<\/span><\/span><\/span><\/td>\n17.8%<\/span><\/span><\/span><\/td>\n16.6%<\/span><\/span><\/span><\/td>\n15.1%<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
Sharpe Ratio <\/span><\/span><\/span><\/td>\n0.71<\/span><\/span><\/span><\/td>\n0.84<\/span><\/span><\/span><\/td>\n0.94<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
# of Stocks<\/span><\/span><\/span><\/td>\n500<\/i><\/span><\/span><\/span><\/td>\n30<\/span><\/span><\/span><\/td>\n500<\/i><\/span><\/span><\/span><\/td>\n<\/tr>\n
% Labeled<\/span><\/span><\/span><\/p>\n

Undervalued by VE<\/span><\/span><\/span><\/td>\n

36%<\/i><\/span><\/span><\/span><\/td>\n23%<\/span><\/span><\/span><\/td>\n36%<\/i><\/span><\/span><\/span><\/td>\n<\/tr>\n
VE Beta<\/span><\/span><\/span><\/td>\n1.14<\/span><\/span><\/span><\/td>\n1.00<\/span><\/span><\/span><\/td>\n1.00<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
VE Alpha<\/span><\/span><\/span><\/td>\n0.00<\/i><\/span><\/span><\/span><\/td>\n-0.04<\/span><\/span><\/span><\/td>\n0.00<\/i><\/span><\/span><\/span><\/td>\n<\/tr>\n
P\/B Ratio<\/span><\/span><\/span><\/td>\n3.5<\/b><\/span><\/span><\/span><\/td>\n4.5<\/span><\/span><\/span><\/td>\n4.7<\/span><\/span><\/span><\/td>\n<\/tr>\n
P\/E Ratio<\/span><\/span><\/span><\/td>\n25.6<\/span><\/span><\/span><\/td>\n18.6<\/b><\/span><\/span><\/span><\/td>\n33.6<\/span><\/span><\/span><\/td>\n<\/tr>\n
Div. Yield<\/span><\/span><\/span><\/td>\n1.3%<\/span><\/span><\/span><\/td>\n1.6%<\/b><\/span><\/span><\/span><\/td>\n1.3%<\/span><\/span><\/span><\/td>\n<\/tr>\n
Exp. Ratio<\/span><\/span><\/span><\/td>\n0.20%<\/span><\/span><\/span><\/td>\n0.16%<\/span><\/span><\/span><\/td>\n0.03%<\/b><\/span><\/span><\/span><\/td>\n<\/tr>\n
Index Provider<\/span><\/span><\/span><\/td>\nS&P Dow Jones Indexes<\/span><\/span><\/span><\/td>\nS&P Dow Jones Indexes<\/span><\/span><\/span><\/td>\nS&P Dow Jones <\/span><\/span><\/span><\/p>\n

Indexes<\/span><\/span><\/span><\/td>\n<\/tr>\n

Index<\/span><\/span><\/span><\/p>\n

Scheme<\/span><\/span><\/span><\/td>\n

Equally Weighted \u2013 Rebalanced Quarterly<\/span><\/span><\/span><\/td>\nShare-Price Weighted<\/span><\/span><\/span><\/td>\nMkt. Cap Weighted<\/span><\/span><\/span><\/td>\n<\/tr>\n
ETF Sponsor<\/span><\/span><\/span><\/td>\nInvesco<\/span><\/span><\/span><\/td>\nSPDRs by SSgA<\/span><\/span><\/span><\/td>\niShares by Blackrock<\/span><\/span><\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Salient observations we can make:<\/span><\/span><\/span><\/p>\n

    \n
  1. The investment thesis that over long periods equal-weighted portfolios will outperform market-cap weighted portfolios is not validated by performance during the past 10 years. In 3-, 5- and 10-year periods, IVV provided higher rates of return than RSP with consistently less volatility.<\/span><\/span><\/span><\/li>\n
  2. The prior 7 years from 2004 through 2010 was more supportive of the thesis lifting the 17.5-year return of RSP to slightly higher than that of IVV, indicating that the outperformance of RSP during those 7 years was greater than 150 basis points during that period. <\/span><\/span><\/span><\/li>\n
  3. The equally weighted S&P provided less expensive valuations in terms of Price\/Book and Price\/Earnings Ratios at each measuring point used in the study. This reflects one reason why active managers tend to prefer equally weighted portfolios. The DIA has the highest dividend yield of the three although all three are near historic lows.<\/span><\/span><\/span><\/li>\n
  4. With an ultra-low 0.03% expense ratio, IVV has been a true bargain during the past 10 years with returns higher than 75% of actively managed mutual funds measured by the SPIVA (S&P 500 Index vs. Active study). <\/span><\/span><\/span><\/li>\n
  5. Alternatively, the 20 basis points charged by RSP is more than 6 times higher. However, it is still relatively low compared to most ETFs based on specialty indexes and certainly an affordable alternative to active management.<\/span><\/span><\/span><\/li>\n
  6. Those worried about technology sector concentration risk currently embedded in the S&P 500 have a solid alternative in equally weighted RSP. It has delivered highly competitive returns since its launch.<\/span><\/span><\/span><\/li>\n
  7. Unfortunately for those looking \u201cto sleep well\u201d, RSP should not be considered a defensive play. During S&P 500 downturns of more than three months, RSP fell more than the IVV all but once during this study. For an equity ETF highly likely to make money when the market goes up and lose less than IVV during significant downturns, check out FSTA, the Fidelity Consumer Staples ETF, discussed in this space twice in the past two months for its resilient defensive characteristics. <\/span><\/span><\/span><\/li>\n
  8. Diamonds is a very sexy name for an investment vehicle. However, the Dow is much better suited for referencing US market movements over long periods of time than it is as an investment vehicle. There are much better alternatives for most investors to DIA.<\/span><\/span><\/span><\/li>\n<\/ol>\n

    Getting back to the article\u2019s title question, the answer is \u201cit depends.\u201d During the past 95 years for which we have S&P 500 history, different economic forces have affected different companies and their stocks in myriad ways. Generally, there have been much-analyzed cycles and regimes that dominate before fading. Some return while others reflect phased-out industries or phased-out analytic techniques. As a lifetime \u201cquant\u201d, I assert with confidence that results depend on the time periods and techniques used for measurement. Some of our greatest academics and practitioners have written revered journal articles demonstrating the historical superiority for equal weighting over market capitalization weighting. Many logical reasons have been put forth as to why this is true. But eleven years of cap-weighted S&P 500 dominance makes one question whether this \u201ctruth\u201d is still valid. Certainly, the rates of return during the past 11 months provide evidence that the market is returning to the historical dominance of equally weighted portfolios. I counter that the market is dynamic. The Internet era has all but eliminated the wide gulf of systematic disintermediation of information relating to stock market performance and the superior historical efficacy of index funds to active management. That knowledge is one of many dynamic factors continuing to change investors\u2019 behaviors.<\/span><\/span><\/span><\/p>\n

    Financial Advisory Services based on ValuEngine research available:<\/strong><\/h5>\n
    www.ValuEngineCapital.com<\/a><\/strong><\/h5>\n

    Which weighting system is superior? I\u2019ll stick with \u201cIt depends.\u201d The good news is that both IVV and RSP are very reasonable holdings as core portfolio ETFs.<\/span><\/span><\/span><\/p>\n

    Herb Blank<\/h6>\n

    Senior Quantitative Analyst<\/p>\n

    ValuEngine, Inc<\/p>\n

    _______________________________________________<\/p>\n

    All of the approximately 5,000 stocks, 16 sector groups, and 140 industries have been updated on\u00a0www.ValuEngine.com<\/a><\/h5>\n
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    Subscribers log in\u00a0HERE<\/a><\/h5>\n","protected":false},"excerpt":{"rendered":"

    By Herb Blank Research Affiliates and Dimensional Fund Advisors have been among the esteemed research and investment firms proclaiming that equally weighted portfolios will deliver superior performance to portfolios weighted by market capitalization also known as cap-weighted. This article explores to what extent that has been true in recent years. IVV is the iShares S&P … Read more<\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[130,1,39],"tags":[1859,1627,1865,1863,1719,1731,1861,1862,1770,1864,1713,1858,1860,1725,28,1656,1659],"_links":{"self":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2762"}],"collection":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/comments?post=2762"}],"version-history":[{"count":4,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2762\/revisions"}],"predecessor-version":[{"id":2766,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2762\/revisions\/2766"}],"wp:attachment":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/media?parent=2762"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/categories?post=2762"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/tags?post=2762"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}