December 5, 2011

Returns on Equal-Weight Strategy Crush Cap-Weight Over Past 10 Years

Improving fundamentals bode well for the strategy heading into 2012

A NYSE trader monitoring market returns. (Photo: AP) A NYSE trader monitoring market returns. (Photo: AP)

If results of the past 10 years are any indication, the strategy of equal weighting the S&P 500 can declare a significant victory over its capitalization-weighted counterpart.

“Even with the Standard & Poor’s 500 Index down 19% since the bursting of the technology bubble in 2000, it’s been no lost decade for stocks,” a Bloomberg story over the weekend notes. “Gains in the S&P 500 Equal Weighted Index 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.”

"The benchmark gauge for American common equity climbed 66% from March 24, 2000, through Dec. 2, after stripping out adjustments for market value," the story says.

But that’s of little help to most investors, whose returns reflect the capitalization-weighted index.

“Corporate America repaired itself,” Chris Hyzy, chief investment officer at U.S. Trust Co., told Bloomberg. “On an equal-weighted basis, it hasn’t been a lost decade.”

Tony Davidow, ETF strategist with Guggenheim Investments, agrees, adding equal weight has dramatically outperformed over the past decade, earning an 1,800 basis point spread in 2009 alone.

“It was able to do that with what we believe to be better beta,” Davidow told AdvisorOne, referring to the risk associated with the strategy. “If you believe market fundamentals are rising, as we do, it means more companies will participate. This in-turn means that equal weighting will allow for more of a small and mid-cap effect.”

Davidow says his own research shows that over the past three years, equal weight strategies have outperformed 75% of the time.

“It’s a more effective strategy in rising markets than in falling markets,” he says. “The improving fundamentals for the last few weeks of this year and the improving conditions in 2012 make for a powerful story.”

Reprints Discuss this story
This is where the comments go.