S&P 500 equal-weighted index

Found an old article from 2004 about the S&P Equal Weighted Index, “Buy the S&P 500 with better returns,” which can be bought under the Rydex S&P Equal Weight EFT (RSP). The S&P Equal Weight index holds all the stocks in the S&P 500 index equally (0.2% each). Rebalancing works like this:

If the share price of one of the companies in the index climbs sharply, the Rydex fund pares it down to a 0.2% weighting when the portfolio is rebalanced every quarter. If a stock tumbles, more is added. Thus the fund is continuously funneling profits from stronger to weaker issues; in effect, selling high and buying low.

I wouldn’t even really call this value investing. This is just common sense. If you created a portfolio yourself of 60 stocks, like the S&P TSX 60 index, would you weight them according to their market capitalization? Probably not. If one of the stocks in your portfolio went up by 50% and another went down by 50%, would you sell the one that went up and buy more of the one that went down? Yes, you probably should, if your transaction costs aren’t too high. If you want to think of it as value investing, that’s fine. I guess compared to the run-of-the-mill S&P500 it is certainly more value-oriented:

“This is a poor man’s value tilt,” says Robert Deere, head of domestic equities for Dimensional Fund Advisors, the foremost operator of customized index funds for institutions.

DFA heavily favors small and downtrodden stocks, citing academic research that shows they outperform big-cap growth stocks over long periods. Since this fund does that implicitly, “I would expect it to give you a higher return — no doubt about it,” he says.

The article pooh-poohs the Rydex Equal Weighted Index’s MERs, “The ETF’s expense ratio is 0.4%. That’s more than three times that of the Spider, eroding indexing’s greatest advantage.” But that hasn’t hurt its returns. According to the article the equal-weighted index has beaten the market-weighted index by 2% over the past 10 years,

Rydex says that the equal-weighted index has greatly outperformed the market-weighted index over the last 10 years, delivering annualized returns of 14%, compared with 12% for the index.

However, this document on S&P’s website puts the 10-year annualized returns at 12% and 9.3% respectively. I will definitely be buying RSP over SPY and not because I am chasing after good past returns but because the methodology makes sense.