Well, it's official. We can all breathe a sigh of relief. 2022, the year of "I did not see that coming," is almost over. But before we close the book on this year, I thought I'd take a quick look at the SPDR S&P 500 exchange-traded fund trust (SPY) and run some attribution against the SPDR Select Sector ETF suite of products.
I began to run some numbers and found that things didn't line up as I expected. I found that taking a portfolio of SPDR Sector funds and comparing it to SPY showed a big difference this past year. As I was thinking about why this might be, it hit me that my post-Christmas food coma was still in effect. I had made the mistake of comparing oranges to tangerines in that the SPDR select results I had calculated were based on an equal-weight portfolio of market capitalization-weighted funds while SPY of course is market-cap weighted both in positions and sectors. To do this analysis properly, I'd have to step away from the equal/market-cap hybrid portfolio and go full equal weight, which I did, using the Invesco S&P 500 Equal Weight ETF (RSP) .
The Results
I ran annual results comparing the two funds going back to the first full-year period for RSP in 2004. Before I get into the results, positive returns shown in the below chart indicate the RSP outperformed in that year and negative returns indicate SPY outperformed. What stands out to me is that in "tough times" the equal-weight S&P 500 seems to have a clear advantage over the traditional market-cap weighted version.
Source: Factset, All You Can ETF
This speaks to the diversifying effects of an equal-weighted strategy. In poker, it is often said that the big stack can push the table around and this is the same phenomenon that can end up driving a lot of market-cap weighted index returns. Through the 2010s it was certain stock concentrations that drove a lot of returns, like the original "FANG" stocks that included Facebook (then FB), Amazon (AMZN) , Netflix (NFLX) , and what was then known as Google (GOOG) . It is not uncommon to see mega-cap names either saving or sinking a sector on any given day.
Index purists will scoff at equal-weighted strategies as introducing mid- and small-cap bias into results but there are enough studies that point to these capitalization ranges as being the high-growth incubators for tomorrow's large-cap giants that many investors welcome that bias.
My Take
While some investors are considering dialing down their exposure to equities in 2023, other investors still have the benefit of a long-term investing horizon. To those folks who are willing to weather what equities are expected to bring in 2023, I would offer that equal-weighted core equity exposure might be worth taking a look at. I base this call on this limited study, the current near-term return trend for these two approaches, and the increasing number of calls for a recession sometime in 2023.
Source: Factset, All You Can ETF
With that, I'll sign off for 2022 and will see you all next year. Happy New Year!
