S&P 500: equal weight is better than cap weighted

Graph of this issue: https://pbs.twimg.com/media/DtLfBz2WsAAdXZE.jpg

Timing is everything. You’d be basking in glory today if you launched a mutual fund 10 years ago that concentrated on mid-cap stocks because they outperformed. You’d be a dunce if you did the same thing in the 1990s because they lagged. Those are the facts behind the recent outperformance of the S&P 500 Equal Weight Index (S&P 500 EWI) and the funds that follow it.

An equal weighted (EW) stock index gives the same weight to each stock in an index. The smallest companies are given equal weight to the largest companies. The S&P 500 Equal Weight Index (S&P 500 EWI) is the equal-weight version of the S&P 500. It has the same constituents as the capitalization weighted S&P 500, but each company is allocated a fixed weight of 0.2 percent quarterly.

Taking a cap-weighted index and turning it into an equal-weighted index will change the average market capitalization of securities held in a fund. The average market capitalization of the S&P 500 is about $58 billion while the average market capitalization of S&P 500 EWI is only $16 billion. Nearly 50 percent of the holdings in the S&P 500 are categorized as mid-cap stocks according to Morningstar.com.

Do you personally prefer to invest in the normal S&P 500? Or do you prefer the equal weight S&P 500 index?

With small caps being expensive, in terms of PE, do you think the equal weight index will continue to outperform over the next 10 years?

Submitted November 30, 2018 at 08:34AM by gorillaz0e https://ift.tt/2FOkASb