When adjusted for size and style factors, the equal-weighted indexes exhibit an alpha of 0.10 percent and 0.13 percent per month for the Russell 1000 and Russell 2000 SEW indexes, respectively, in the last decade, though these are not statistically significant. For the 1980s and 1990s, a negative alpha is observed for both the Russell 1000 and Russell 2000 SEW indexes and is statistically significant.
The regression results provide strong empirical support for assertion that equal-weighted indexes tilt toward smaller-capitalization securities to a statistically significant level. For each decade, the SmB coefficient is more than 0.4 for the Russell 1000 SEW index and more than 0.9 for the Russell 2000 SEW index. Thus, the Russell 1000 SEW index is influenced by mid-cap securities, and the Russell 2000 SEW index is strongly influenced by securities at the middle to bottom of the Russell 2000 benchmark.
What is even more interesting is the shifting influence of growth and value factors from one decade to the next for both the Russell 1000 and Russell 2000 SEW indexes. The indexes seem to exhibit a growth tilt for much of the 1980s, a “value” tilt for the 1990s and then a growth tilt for the 2000s.
Contribution To Return By Sector
In Figure 13, we compare cumulative contribution to return by sector from July 1996 to December 1999 and January 2000 to June 2010 between the Russell cap-weighted and SEW indexes. Not surprisingly, the technology, consumer discretionary and financial services sectors contribute almost 66 percent of the total return. While all of the sectors in the Russell SEW 1000 index had a positive return for the period 1996 to 1999, the contribution from seven of the nine sectors underperformed the sector returns of the cap-weighted index.
We see similar results for the Russell 2000, with the technology and financial services sector driving the returns of the cap-weighted index. Although the Russell 2000 SEW index has five of the nine sectors contributing higher returns than those of the cap-weighted index, they are not high enough to overcome the low contributions from the technology and financial services sectors. Thus, the cap-weighted index outperformed the Russell 2000 SEW index for the 1996-1999 time period.
As we previously observed, the outperformance is reversed within the last decade, with the SEW indexes outperforming the cap-weighted indexes significantly. Every sector in the Russell 1000 SEW has a positive return and a higher contribution than the cap-weighted indexes. The energy sector has the highest contribution, providing 25.4 percent of the total return for the SEW indexes. Comparatively, within the Russell 1000 cap-weighted index, the energy sector contributes only 1.7 percent, with the consumer staples sector providing the largest contribution at 3.7 percent. The technology sector has a large negative contribution of 13.9 percent in the Russell 1000 cap-weighted index, resulting in the index having a negative performance of 10.9 percent for the 2000-2010 time period.