The Russell Equal Weight Indexes: Performance5
In this section, we examine the investment performance of quarterly rebalanced cap-weighted SEW and CEW index structures in the U.S. large- and small-cap equity markets and in global developed and emerging markets. Generally we find that the Russell Equal Weight indexes display superior returns with lower levels of volatility when compared to cap-weight and CEW indexes over our sample periods.
Performance Of U.S. Indexes
Figure 6 displays the performance of the Russell 1000 SEW, CEW and cap-weight indexes from December 1978 to June 2010. The cumulative return of the SEW index was almost double that of the cap-weighted Russell 1000 index from January 1, 1979 to June 2010 and 35 percent more than that of the CEW index. Since 1979, the cap-weighted indexes outperformed the equal-weighted indexes for a meaningful period of time just once, during the tech bubble of the late 1990s.
Previous research has suggested that during periods of strong bull markets, equal-weighted indexes can underperform cap-weighted indexes (Dash and Loggie [2008]). However, an extension to this might be necessary. While it may be true that equal-weighting underperformed during this period, we should note that from 1998 to 2000, the market was sector-led. Mega-cap technology stocks contributed significantly to the return of the cap-weighted indexes during this period. The weight of the technology sector in the Russell 1000 cap-weighted index increased significantly over this time period, going from 11.5 percent on January 1, 1998 to a high of over 30 percent on July 3, 2000. Comparatively, the weight of the technology sector in the Russell 1000 SEW index was consistently reset to 11.1 percent throughout this sample time period. It is fair to conclude that the outperformance of the sector during this period led to the outperformance of the cap-weight indexes over the equal-weighted indexes. We also note that having such a large weight in the technology sector of the Russell 1000 Index hurt performance after the bubble burst, with the equal-weighted indexes faring better than the cap-weighted indexes during the technology sector downturn in 2001 and 2002.
Cumulative returns are presented for the cap-weighted SEW and CEW Russell 2000 indexes from 1979 to 2010 in Figure 7. The Russell 2000 cap-weighted index outperforms both the SEW and CEW indexes for much of the 1980s and 1990s, and does so handily during the tech bubble of the late ’90s. However, after the year 2000, the SEW index outperformed the cap-weighted Russell 2000. The Russell 2000 SEW index outperformed the respective CEW index over this time period. We note that the value of an investment in the CEW index would not have been higher than that of a like investment in the sector equal-weighted index for any significant period of time.
