Investors have been waiting for more than four years now for the S&P 500 to eclipse its October 2007 high. But, according to SmartMoney’s Jack Hough, the index has already done so and is on the verge of doing it again. Well, sort of.
“The Standard & Poor’s 500-stock index — “the market” to many investors — must climb another 16% to top its October 2007 all-time high,” Hough writes. “But the S&P 500 Equal Weight index, which tracks the same companies, hit a new high last May and is only a few percentage points away from hitting another.”
The difference in the indices is that the traditional S&P 500 weights its holdings according to market cap; the equal weighting index of course weights them equally. Over five years through 2011, the equal-weighted index returned 1.75% a year, while the traditional S&P lost 0.25% a year. The equal-weighted version was introduced in January 2003, but S&P’s research shows it would have returned 10% a year over two decades through 2009, versus 8.2% for the traditional S&P 500, Hough writes.
Hough notes that the equal-weighted index, which give smaller companies more control over the index than the traditional 500, has been more volatile than the traditional 500 over the past five years, though not by much. The traditional version is also more prone to bubbles, because companies gain more weighting as their prices get bid up.
Drawbacks to the equally-weighted index are that it usually comes with higher fees, and involves more turnover than the traditional S&P index. And a quirk of the equal-weighted index is that tends to give more weight to sectors that have many companies and less weight to those with fewer members, according to Hough.