Comments on: Is the S&P 500 a passive index or an actively managed mutual fund?

By: Investing Intelligently » Blog Archive » Non-Market Cap Weighted Indexes: The Next Big Thing

Thu, 09 Feb 2006 20:59:54 +0000

[...] I predict that within the next 10 years we will see a wave of new index ETFs and index/passive mutual funds. Almost all indexes currently available (and the ETFs and mutual funds that track them) are market-cap weighted. The technique that is usually used is that the stocks in some set (all Canadian stocks for instance) are sorted by their market capitalization (and other factors as well, but market cap is the dominating one). The index is then made up of the first n stocks in that list, where n is however many stocks should be in the index. This indexes may suit the media or other people interested in tracking “the market,”, but there are many disadvantages to using this form of indexing as an investment, and investing my market-cap is quite a non-intuitive way to to invest. I have talked about some of the disadvantages of market-cap based indexes here: past articles. Non-market cap weighted indexes have a huge advantage over their market-weighted counterparts. I have discussed this in past articles using examples in the Canadian market and the US market. [...]

By: Dave

Dave — Thu, 08 Dec 2005 18:23:21 +0000

Loi, here is the performance of the Rydex S&P equal weighted index compared to SPY. It hasn't been around for long, but in that time it has kicked SPY's ass (60% gain in ~2.6 years vs. 30% gain). I also put the Dow and Nasdaq on there for further comparison.

By: Loi Tran

Loi Tran — Thu, 08 Dec 2005 17:45:38 +0000

Great post. The Rydex S&P equal weighted index looks like a good option for passive investing. It rebalances every quarter. The expense ratio is .4 which seems a little higher than the average S&P index ETF, but I think it’s worth the extra expense.