Equal Weighted S&P 500 vs Cap Weighted

by | Apr 16, 2014 | Asset Management, Podcasts

It may or may not surprise you to hear that since January 1, 2000 the S&P 500 is up 24.59%. However, we bet you’re absolutely surprised to hear that during the same time period the equal weighted S&P 500 is up 152.86%. These numbers come to us courtesy of our good friends at Dorsey Wright and Associates. The variance in returns seen here lies in the composition of these indexes. Tom and Brendan discuss the differences between the S&P 500 and its equal weighted counterpart on this week’s Mullooly Asset Management podcast.

The S&P 500 that we hear about in the news every day is a cap weighted index. Out of the 500 stocks that make up the index, the ones with the largest market capitalization are responsible for most of the return. In fact, the top 50% of the S&P 500 (250 stocks of 500) controls 80% of the index’s return. To put it plainly, when the big stocks move the index as a whole tends to go with it.

In contrast, the equal weighted S&P 500 gives all 500 stocks the same weighting. Every stock represents 1/500th of the equal weighted S&P 500’s movement. This means that even the stock with the 499th largest market cap has a say in what the index is doing. The equal weighted S&P 500 is influenced by the trends of small and mid cap stocks much more than the regular cap weighted S&P 500. According to Dorsey Wright and Associates data, that exposure has been useful over the past 13+ years now.

Now this week’s podcast is NOT a way of us saying that the equal weighted S&P 500 will ALWAYS be superior to the cap weighted S&P 500. Nothing lasts forever! It is interesting to note its marked out-performance of the cap weighted S&P over the time period discussed though.

Make sure to listen to the podcast to hear the full discussion on the cap weighted and equal weighted S&P 500, and always consult your personal investment advisor before making any investment related decisions.

Again, all of the market data used for this week’s podcast and post was provided to us by our good friends at Dorsey Wright and Associates. Check out their site, you can learn a ton from these guys.

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