Tag Archives: equal weighting

Surprising but Explainable

Equal-weight indices have a small-cap tilt. Therefore, one might naturally assume that the volatility of equal-weight indices is higher than that of their cap-weighted counterparts. Surprisingly, this is not always the case, and we can understand why using the lens of dispersion and correlation. Exhibit 1 shows that the volatility of the S&P 500® Equal Read more […]

Security Selection & Sector Allocation Effects of Equal Weighting the S&P 500®

Constituents of the S&P 500 Equal Weight (EW) and S&P 500 are identical, but the EW version is rebalanced quarterly so that every company has equal representation after the rebalance.  That often results in significantly different performance between the two indices, because equal weighting gives more representation to smaller stocks and alters the distribution of Read more […]

The Rest of the Story

This morning’s Wall Street Journal offered a partial explanation for the failure of most active managers to outperform their cap-weighted index benchmarks in 2014.  The proffered explanation is that “the rally in U.S. stocks was generally led by giant-company shares, such as Apple Inc., which rose 40%.”  Since most active funds are underweight most mega-cap Read more […]

Creating a Performance Tailwind

Some stock selection schemes seem silly.  This weekend’s Wall Street Journal reports the results of two hypothetical portfolios which are clearly intended to be nonsensical.  One example, the so-called “Graham and Buffett Portfolio” comprises stocks whose ticker symbols consist only of the letters found in the names “Benjamin Graham” and “Warren Buffett.”  Silly it may sound, but Read more […]

The Power of Blind Luck

This is a story about the power of randomness, and its application to investing. A good few years ago, I had the pleasure of meeting Bob “The Rock” Cooper. Bob, an otherwise unassuming sales manager from London, had just won the world championship in the princely sport of “Rock Paper Scissors”. Yes, there is such a Read more […]

Ready to Roll or Need to Weight?

In the past few years a number of indices have been launched with a goal of minimizing the impact of contango.  The first indices launched with this goal were the simple (1-5 month) forward indices and the relatively static S&P GSCI Enhanced. In the time period from Aug 2004-May 2011, mentioned in my prior post, these Read more […]

A PIP Off the Old Block

The staff of the Financial Industry Regulatory Authority (FINRA) recently issued an opinion letter discussing the use of “pre-inception index performance (PIP)” data in communications about exchange-traded financial instruments.  Importantly, the letter permits the use of PIP data (i.e., backtested or simulated results) in presentations to institutions (although not to retail investors). No good deed Read more […]