The Rydex S&P Equal Weight ETF (NYSEArca:RSP) has returned
more than twice as much as the SPDR S&P 500 ETF (NYSEArca:SPY)
this year, with just 20 percent more risk, raising questions about
the validity of capitalization weightings in index ETFs, ConvergEx
Chief Market Strategist Nicholas Colas says.
While the equal-weighted Rydex S&P ETF, with year-to-date
returns of 8.59 percent, was far and away the best of the five
S&P 500 funds ConvergEx looked at, all beat SPY's 4.2 percent
gain, with returns clustered around 4.5 to 5.5 percent, Colas wrote
in his daily briefing on Oct. 22.
"I am not ready to say that we should ditch market cap weighting
altogether, but the data here is certainly a case study in how to
consider portfolio composition," Colas wrote in the briefing. "The
same stocks, assembled in different ways, yield very different
Colas stressed that risk is a crucial variable in choosing
investments and, RSP's relatively heavy exposure to the relatively
volatile materials sector was the main reason it outperformed its
competitors. ConvergEx measured risk as the standard deviation of
daily returns, Colas said.
"That outlier performance of the equal-weighted RSP is the
result of incremental risk-taking, but not very much, really. For
less than 20 percent more risk, you have been able to essentially
double your returns so far into the year," said Colas, who talked
to IndexUniverse.com recently about growing risks of a double-dip
recession in the U.S.
Included among the S&P 500 ETFs, or acceptable proxies, that
ConvergEx looked at and their year-to-date returns were:
- SPDR S&P 500 ETF (NYSEArca:SPY), 4.24 percent
- RevenueShares Large Cap ETF (NYSEArca:RWL), 5.48 percent
- WisdomTree Earnings 500 ETF (NYSEArca:EPS), 4.35 percent
- WisdomTree LargeCap Dividend ETF (NYSEArca:DLN), 5.33
- Rydex S&P Equal Weight ETF (NYSEArca:RSP), 8.59
- ALPS Equal Sector Weight ETF (NYSEArca:EQL), 4.73
Colas noted that something like $3.5 trillion of capital is
benchmarked to the S&P 500 Index, and almost $1 trillion is
indexed directly to it, showing just how deeply entrenched the
S&P 500 index has become in the fabric of modern finance.
SPY is the most popular exchange-traded fund in the U.S. and the
biggest ETF in the world. It had $4.91 trillion in turnover through
September and, through Oct. 20, had $80.51 billion in assets,
according to data compiled by IndexUniverse.com.
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