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| Rydex
Equal-Weight S&P 500 (RSP) |
Published: November 9, 2004
Most of the major market indices that we follow are capitalization
weighted. This means that each stock's percentage weight in the index is
based on the value of the company's shares as a percentage of the value
of all firms within the index.
For example, if a Company A has 10 shares outstanding and each share is
worth $10, then it has a market capitalization of $100. If Company B has
one share and it is worth $25, then its market cap is $25. In this
example, Company A would then account for 80% of the index.
This kind of weighting means that as share prices increase, the larger
stocks tend to get bigger and the smaller stocks tend to account for a
lesser percentage of the underlying index. The Rydex Equal-Weight ETF
avoids this problem. It holds all 500 stocks in the S&P 500 Index
(^SPX) in equal weightings (these weightings are based on the start date
of the fund, so there are minor differences). In other words, General
Electric (GE) approximately comprises the same 0.2% of the fund as does
the smallest company in the S&P 500, Piper Jaffray (PJC). By
comparison, it's worth noting that GE makes up about 3.2% of the
traditional market-cap weighted S&P 500 Index, yet PJC accounts for
less than 0.01% of it.
Studies have shown that this type of equal-weighted index has
outperformed the capitalization weighted index going back to 1989. The
equal-weighted index outperformed by a cumulative +30% between late 1991
and the middle of 1999, but underperformed by -50% from mid-1999 until
early 2001. Essentially, when large-cap stocks are doing very well, the
cap-weighted index will perform better. However, when small and mid-cap
stocks are out performing, the equal-weight index will do better.
The one key advantage to an equal-weight index is that you pretty much
always know what the fund holds. When individual stocks and sectors
start to outperform, they begin to account for a larger and larger
percentage of a weighted index. This significantly raises the risk in
your portfolio, as the fund becomes less diversified. This means that
during powerful bull markets, equal-weight indices will tend to
substantially underperform their cap weight counterparts (meanwhile, in
a sharp bear market, the opposite is true). This was borne out by the
performance in the S&P 500 equal-weight and capitalization weight
indices since 1998.
The correlation, using monthly returns, between the S&P 500
equal-weight and cap weight indices is about 92% going back to January
1990. This is lower than the correlation between the Dow Jones
Industrial Average and the S&P 500. In fact, this 92% correlation is
very similar to the correlation between the S&P 500 and the S&P
400 Mid-Cap Index (that exact correlation is 89%). Essentially then, the
equal weighting gives the S&P 500 a similar look to a mid-cap
weighted index even though there is no overlap in the actual stock
holdings.
| Rydex
Equal-Weight S&P 500 (RSP) |
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| Type: |
Broad Index |
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| Options?: |
No |
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| Performance
Data |
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| 52-week High: |
$148.50 |
11/5/2004 |
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Annualized
return since: |
| 52-week Low: |
$124.43 |
11/20/2003 |
|
One-year |
17.00% |
| YTD Return: |
9.83% |
(as
of 11/5/2004) |
Three-year |
N/A |
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Five-year |
N/A |
| Dividends: |
$1.42 |
past
12-mos |
Life of fund* |
28.91% |
| Expense: |
0.40% |
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*
- Started trading 5/2/2003 |
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| Correlation
Data* |
(since
1990, monthly)) |
Holdings* |
(as of
10/31/2004) |
| S&P 500 |
|
92.4% |
|
Apple
Computer (AAPL) |
0.28% |
| S&P 400 |
|
88.8% |
|
Delta
Air Lines (DAL) |
0.27% |
| Russell 2000 |
|
78.6% |
|
TXU
Corp. (TXU) |
0.26% |
|
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Advanced
Micro Dev. (AMD) |
0.26% |
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Citrix
Systems (CTXS) |
0.26% |
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CIENA
(CIEN) |
0.25% |
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Gateway
Inc. (GTW) |
0.25% |
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BMC
Software (BMC) |
0.24% |
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Veritas
Software (VRTS) |
0.24% |
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Teradyne
Inc. (TER) |
0.24% |
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*
Percent top ten are of total |
2.55% |
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| Average
Daily Volume |
|
Average
Daily Price Range |
| Oct-04 |
40,543 |
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Oct-04 |
1.0% |
| 2004 YTD |
35,040 |
|
|
2004 YTD |
1.0% |
| *
- Correlation measures how closely the two items track each
other |
|
*
Includes prior day's close (true range) |
The question then comes as to why you might want to hold the Rydex
S&P 500 Equal-Weight Fund (RSP) as opposed to something like the
Mid-Cap SPDR (MDY). The correlations between the two are similar. MDY
trades with higher volume and therefore shows a tighter bid/ask spread.
Note, however, that RSP's volume, which had been stuck near 20,000 to
30,000 shares per day, has recently picked up, often reaching over
70,000 shares. In fact, on November 3rd more than 320,000 shares of this
fund changed hands.
The higher volume on MDY is an advantage for that fund, as is the
typically tighter bid/ask spread. Favoring RSP is the fact that you have
probably heard of most of the stocks in RSP. You can more easily hedge
RSP issues than MDY issues and there are more options trading
possibilities based on the holdings in RSP as well. There is also
certainly more analyst coverage of the issues held in the S&P 500 as
compared to those in the S&P 400.
Another use of RSP would be to hedge one fund with the other. Because
they act similarly, you can hedge a long MDY trade with a short RSP
position, and vice-versa. This fund might also allow you to take a tax
loss on MDY, as you could purchase RSP in the meantime to avoid the wash
sale rule.
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