All Things Being Equal

August 01, 2004

In a previous article, I compared and contrasted the traditional S&P 500 to an equally-weighted version of the investment industry's dominant benchmark index. 1 In the fall of 2002, Standard & Poor's and Rydex Funds Company constructed an equally-weighted S&P 500 index with returns simulated through an official S&P methodology that invests 0.20% of portfolio capital into each of the index's 500 issues. The new index's symbol is SPXEW. 2

After many years of researching the performance attributes and characteristics of an equally-weighted S&P 500, I believe SPXEW is an appropriate substitute as a satellite investment for those seeking growth, value, small and mid-size company diversification. It is a simple, but not simplistic, sampling option.

On the surface SPXEW is not complicated. Its physical construction and management are very simple, but understanding its role in a portfolio requires a thorough understanding of economics and market dynamics. The most important characteristic of SPXEW is its passive rebalancing among S&P 500 sectors and value - growth issues. Over the long-haul, this feature enables it to best the market-cap weighted S&P 500.

Performance attribution analysis via S&P Fact Set software is shown in Figure 1. It reveals that 70% of SPXEW's performance is most similar to that of a mid-cap value style manager.3 Attribution analysis measures the degree to hich sectors, styles and cap tiers contribute to a portfolio's performance.

Morningstar Principia Pro mutual fund software only measures the weighting of a fund's cap tier and style. It does not measure the areas that dominate or contribute little to performance.4 Morningstar analysis identifies nearly equal attribution to large-cap and mid-cap tiers with 3% of an equally-weighted S&P 500 performance attributable to small cap style managers.5 However, since 1978 SPXEW has recorded a 0.87 correlation to the Wilshire Mid-Cap Value Index while the S&P 500 records 0.64.


Fama & French identified three factors that dominate equity returns; these were systemic (market), value, and size factors.6

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