Positioning For A Broader Rally

Using portfolios of market cap-weighted and equal-weighted mid- and large-caps (since the S&P 500 Equal Weight was only launched in January 2003 and can’t be used for comparison here), the equal-weighted portfolio was up more than 25% for the decade, while the cap-weighted Index lost more than 8%. 

Figure 3_Returns last decade

2021: The Year of the Chihuahuas?

As 2020 reminded everyone, the economy’s performance doesn’t dictate the S&P 500’s performance. With likely far better economic conditions in 2021, that could mean a more muted outlook for the headline Index, and better returns for smaller, more economically sensitive stocks (the Chihuahuas). 

WisdomTree’s U.S. Multifactor Index (WTUSMF) was designed to tap into the diversification elements of equal weighting, while also aiming to mitigate the increased volatility and sector bets that can arise from a simple equal-weighted strategy. As a byproduct of its modified equal weighting, it allocates nearly one-third of its weight to mid-caps.

Percent Index Weight in Mid-Caps

Figure 4_Percent Index Weight in Mid-Caps

Through the early weeks of 2021, WTUSMF is outpacing the S&P 500 by more than 150 basis points.2 If 2021 shapes up to be a turning point for a broader equity rally than one we have seen in recent years, watch out for greater outperformance from indexes less heavily reliant on outperformance from select mega caps. 

Top 5 S&P 500 Index Weights

Figure 5_Top 5 SP 500 Index Weights

 1Nicholas Jasinski, “The Stock Market Could Gain Another 10% Next Year, Experts Say,” Barron’s, 12/18/20.
2Sources: WisdomTree, S&P, 12/31/19–3/9/21. 

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