Market Insights

Revisiting an Equal Weighted Approach

August 4, 20233 Min Read
August 4, 2023
3 Min Read
Revisiting an Equal Weighted Approach

Michael E. Schroer, CFA

MANAGING PARTNER & CHIEF INVESTMENT OFFICER | RENAISSANCE INVESTMENT MANAGEMENT

Highlights

Given the outperformance of mega cap stocks and their contribution to the cap weighted S&P 500® Index’s performance in the first half of 2023, it may be surprising to learn that the equal weighted S&P 500 has actually outperformed the cap weighted index significantly over time.

Growth of a Dollar
S&P 500 Index, Equal Weighted vs. Cap Weighted
Data ending 12/31/1989–6/30/2023.  Past performance is not indicative of future results. Performance for periods of one year or less is not annualized. All returns are price change only and shown in U.S. dollars. Sources: FactSet

The equal weighted version of the S&P 500 Index was launched in December 1989, and since its inception, it has outperformed the cap weighted S&P 500 Index by an annualized 100 basis points per year. This differential may not seem like much, but it results in a +36% difference in the ending portfolio values over the entire period. Over a short-term period such as 12 months, the equal weighted index has outperformed slightly more than 50% of the time, but the longer the time horizon, the more likely the index outperforms.

Frequency of Outperformance

S&P 500 Equal Weighted Index vs. Cap Weighted Index, Rolling Periods1

equal weighted
Data ending 12/31/1989–6/30/2023.  Past performance is not indicative of future results. Performance for periods of one year or less is not annualized. All returns are price change only and shown in U.S. dollars.  Sources: FactSet

We saw a dramatic reversal of this pattern in the first half of this year, however. Over the first six months, the equal weighted S&P 500 posted a return of 7.0%, or 9.9% below that of the cap weighted index. This -9.9% differential ranks in the lowest 1% of all 6-month rolling periods since 1989 and was matched only in 1999-2000 and 2020. After similar 6-month periods of 9% underperformance or more, the equal weighted index posted sharply higher returns than the cap weighted index over the following six and twelve months, suggesting an opportunity to consider a rebalancing of portfolios to more equal weighted positions.

Rolling 6-Month Difference
S&P 500 Equal Weighted Minus Cap Weighted Return
equal weighted
Data from 6/30/1990—6/30/2023
Source: FactSet
Average Performance Difference
S&P 500 Equal Weighted Minus Cap Weighted Return
equal weighted
Data from 6/30/1990—6/30/2023
Source: FactSet

The outperformance of mega cap stocks has resulted in high levels of index concentration in a relatively small number of stocks. While much of the market’s advance this year is because of the mega caps, much of the decline in the market last year was due to mega caps as well. At the end of the second quarter, the weighting of the 10 largest stocks in both the broad Russell 1000® Index and the growth oriented Russell 1000® Growth Index was at or near the highest levels ever, reflecting their popularity among investors.

Weight of 10 Largest Stocks in the Russell 1000 and Russell 1000 Growth Indices
Data from 12/31/1984—6/30/2023
Sources: FactSet, FTSE Russell

“Popularity” doesn’t translate into “bulletproof,” however. 1999 and early 2000 were marked by a high level of index concentration as well, and mega cap stocks were among the most popular holdings. While those companies may have been viewed then as core long-term holdings that might never need to be sold, 8 of the 10 largest stocks in the Russell 1000 Index in early 2000 underperformed the S&P 500 since that time and 6 have actually declined in price over the past 23 years. It is worth noting that the equal weighted S&P 500 also strongly outperformed the cap weighted version over this period.

Where Are They Now?
10 Largest Russell 1000 Companies as of 3/31/2000(1) (prices adjusted for splits)
Data as of 6/30/2023. Price change only. Any securities referenced should not be considered a recommendation to purchase or sell a particular security. The past performance of these securities is no guarantee of future results. Lucent merged with Alcatel on 11/30/2006. Closing price on 11/29/2006 was $2.34.  Source: FactSet

The intent of this paper is not to suggest that investors should sell every mega cap stock they own today. However, we believe investors should review their current portfolios carefully to ensure that they are diversified beyond only the largest, most popular companies. There is an excellent opportunity today to take advantage of the return potential from a more equal weighted investment approach.

LEARN MORE ABOUT RENAISSANCE

Michael E. Schroer, CFA

MANAGING PARTNER & CHIEF INVESTMENT OFFICER | RENAISSANCE INVESTMENT MANAGEMENT

Highlights

Given the outperformance of mega cap stocks and their contribution to the cap weighted S&P 500® Index’s performance in the first half of 2023, it may be surprising to learn that the equal weighted S&P 500 has actually outperformed the cap weighted index significantly over time.

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Past performance is not a guarantee of future results.

This Market Update reflects the thoughts of Renaissance as of June 30, 2023. This information has been provided by Renaissance Investment Management. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision, nor should it be considered a recommendation. The views and opinions expressed are those of the Chief Investment Officer at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.

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REFERENCED INDICES (Indices are unmanaged and are not available for direct investment)
Russell 1000 Growth Index — The Russell 1000® Growth Index is a market capitalization weighted index that measures the performance of those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000 Index — The Russell 1000® Index is a market capitalization-weighted index of the approximately 1,000 largest companies in the U.S. equity market.
S&P 500 Index —The S&P 500 Stock Index is a market capitalization weighted index and consists of 500 stocks chosen for market size, liquidity and industry group representation.

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S&P DATA
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