Swedroe: Equal Weighting Not So Magical

June 21, 2017

'THRK'

While keeping the factor tilts in mind, for the one-year period ending June 9, 2017, RSP underperformed the SPDR Russell 3000 ETF (THRK) 15.0% versus 17.9%.

For the three-year period, it underperformed 8.4% versus 9.5%. For the five-year period, it outperformed 15.7% versus 15.2%. And for the 10-year period, it outperformed 7.7% versus 7.4%.

'EQAL' 
We can also examine the performance of the PowerShares Russell 1000 Equal Weight Portfolio (EQAL) ETF, which had roughly $308.3 million of assets as of June 9. Writing for ETF.com in March 2015, Clayton Fresk, a portfolio management analyst at Georgia-based Stadion Money Management, made the case for investing in this fund.

For the period January 2015 through April 2017, the fund produced a Fama-French three-factor alpha of -21.6 basis points per month (-2.59% per annum) with a t-stat of -1.29 (indicating it’s not statistically significant). However, the fund did load 0.10 on size and 0.04 on value, indicating it has a tilt toward small-cap stocks and a very small tilt toward value stocks. Also, the equal weighting led to a loading on market beta of 1.07.

Again, we see there is nothing really unique about equal-weighting. Moreover, it certainly hasn’t been “smart beta” in this case either. The r-squared figure was 95%, indicating the high explanatory power of the model. For the one-year period ending June 9, 2017, EQAL returned 12.3%, underperforming THRK, which returned 17.9%.

'EUSA'

There’s one other equal-weighted fund we can look at, the iShares MSCI USA Equal Weighted ETF (EUSA), which had about $130.3 million of assets as of June 9. For the period June 2010 through April 2017, the fund produced a Fama-French three-factor alpha of 5.6 basis points per month (0.67% per annum) with a t-stat of 0.52 (indicating it’s not statistically significant).

Surprisingly, the fund had slightly negative loadings on both size (-0.02) and value (-0.06). Also, the equal weighting led to a loading on market beta of 0.95. The r-squared figure was 93%, indicating the high explanatory power of the model.

For the one-year period ending June 9, 2017, EUSA underperformed THRK 16.0% versus 17.9%. For the three-year period, it underperformed 8.8% versus 9.5%. And for the five-year period, it underperformed 14.6% versus 15.2%.

Conclusion

The bottom line is that there’s nothing especially “smart” about equal-weighting. It’s just another way to obtain exposure to common market factors.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

 

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