We’ve got front row seats to the battle royale between cap-weighted and equal-weighted ETFs—especially as Top 5 members Google, Apple, Amazon, and Facebook (all of the S&P 500) beat Street estimates last week. Price action continues to accelerate as investors seem to have concluded “the higher the better!”
While historical analysis shows that equal-weighted funds produce superior returns, this period seems to support the opposite. Cap-weighted funds have benefited from the rising performance of the information technology sector.
SPY, with over $292B in AUM, boasts a YTD return of +4.28%, driven by a 25% stake in the anomalous Top 5 performing stocks (while equal-weighted funds languish with a 1% stake). We see this as a “shock & awe” event and don’t expect a change in approach to valuations. We will take a closer look at the S&P 495 as companies report Q3 and Q4 earnings.
By comparing SPY head-to-head with similar funds, we uncover a slightly better recommendation: IVV reduces investment fees by 6 bps while lowering use of capital by 3.3%.
RSP, a traditional choice among equal-weighted S&P funds, delivered negative (4.28)% return for YTD 2020. Our analysis of over 132,000 possible replacements for RSP led us to IWP, which has increased returns by 3.9% and reduced risk by 2.7% with only a slight bump in fees.
What We’re Reading
- S&P 500 Market Crashes – Infographic illustrating the intensity of the most recent stock market crashes tied to the S&P 500.
- Time for Thinking– Robust client letter from Howard Marks that recaps the current pandemic, capital markets, and the recovery.
- Carson Group to Give $500K to Next Gen Black CFPs– The Carson Group of Omaha has pedged 500K in scholarship to support the next generation of Black CFPs.
- 81% of All Tradeable Assets will Decline over the Next Decade Warns Hedge Macro Fund– The CIO of Pervalle Global hedge fund pronounces his view that most tradeable assets will depreciate over the next decade.
- The Cult of Statistical Significance– Short CFA article which debates the following around statistical significance.
- Seth Klarman Says He Was a Significant Seller During the Second Quarter Comeback– Portfolio manager Klarman discusses how he approached selling through the Q2 market spike and what he sees going forward.
- Big Tax Shift– Article produced by an investment researcher at Seeking Alpha on how shifting tax policy impacts global economies and investment portfolios.
- Decade of Managed Volatility – PIMCO– Major paper produced by PIMCO on major investment strategies and how effective they are within risk mitigation of drawdown periods.
- ETF Backers Declare Victory after “Largest Stress Test” Ever– FT article which discusses the popularity of ETFs and the outflows that continue to plague actively managed funds.
Connect with Us
Hop on a quick, scheduled 15 min Zoom call with us and explore some new ideas about how to engage your clients and families.
Have a great week!
John DiBenedetto and the Portformer Team