What happens if you change the weighting of the stocks in an index?
The chart below shows the normal S&P 500 (black line) compared to an index that weights each company equally (red line) — i.e., 0.2% to each company regardless of size.
From 2013 to July this year, the equal-weighted index beat the S&P 500 almost all the time. In fact, if you’d invested $10,000 in an equal-weighted index ETF in 2003, you’d have earned 33% more than a conventional ETF like SPY by now.
Equal-weighted indexes like the Guggenheim S&P 500 Equal Weight ETF (NYSE: RSP, above) have been around for a while. But now someone wants to go even further and launch a reverse-weighted ETF.
Even Stranger Things: The Upside-Down ETF
The Reverse Cap Weighted U.S. Large Cap ETF (NYSE: RVRS) launched last week. It holds all the components of the S&P 500 but flips their weighting, so that the proportions of its components are determined by the inverse of their relative market capitalization. Apple is the largest stock in the S&P 500, but it is the smallest component of the new fund.
By contrast, the smallest stocks in the S&P — Navient Corp. (Nasdaq: NAVI), Chesapeake Energy Corp. (NYSE: CHK) and Patterson Cos. Inc. (Nasdaq: PDCO) — are the largest components of the fund. Combined, they are worth just 0.4% as much as Apple.
In back testing, this “upside-down” ETF outperformed both the normal S&P 500 and an equal-weighted model over the last 10 years.
From 2013 to July this year, the equal-weighted index beat the S&P 500 almost all the time. In fact, if you’d invested $10,000 in an equal-weighted index ETF in 2003, you’d have earned 33% more than a conventional ETF like SPY by now.
Equal-weighted indexes like the Guggenheim S&P 500 Equal Weight ETF (NYSE: RSP, above) have been around for a while. But now someone wants to go even further and launch a reverse-weighted ETF.
