Since its inception, the S&P 500® Equal Weight Index has outperformed the S&P 500 by 1.4% annually. Year-over-year performance margins, however, are anything but steady. Exhibit 1 shows that the S&P 500 Equal Weight Index and its cap-weight counterpart have gone through many performance cycles over the past 30 years.

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Mega caps experienced record performance during the past year, especially in the Information Technology sector, which is up a remarkable 46% over the past 12 months (Apple, Microsoft, Alphabet, Amazon, and Facebook account for 18% of the S&P 500’s weight).

As a result, the performance of the S&P 500 Equal Weight Index, which has a small-cap bias, suffered, lagging the S&P 500 by 6.2% over the past 12 months. Exhibit 2 demonstrates that larger-cap stocks dominated within most sectors of the S&P 500, particularly in Information Technology. Of the 11 equal weight sectors, 9 underperformed their cap-weighted counterparts. Intra-sector weighting in Information Technology and its underweight to the sector were responsible for more than half of Equal Weight’s shortfall.

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It is important to understand the historical context of Equal Weight’s recent underperformance. We can look to its history to put the current 6.2% loss in perspective. In August 2000, for example, the S&P 500 Equal Weight Index had underperformed by 5.9% over the trailing 12-month period. Exhibit 3 shows that this underperformance reversed itself in two months, followed by peak outperformance of 29.2% six months later in February 2001.

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A similar occurrence took place in January 1991, when the Equal Weight underperformed by 5.9% over the trailing 12-month period. Exhibit 4 illustrates that, again, this underperformance reversed itself in the subsequent months with outperformance of 11.2% in October 1991.

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We obviously can’t know in advance what the future relative returns of the S&P 500 Equal Weight Index will be. What history teaches us, however, is that Equal Weight’s recent underperformance is unusual, but not unprecedented.