Can anyone recommend a decent reverse Cap weighted S&P500 ETF

The key word is "reverse" as distinct from "inverse". So I presume you mean to have positive exposure to the S&P500 stocks in particular but with more exposure to the smallest market cap stocks and the least exposure to large stocks such as Apple and Google.

Of note firstly, the firms in this index of the top 500 firms in the US are *all* huge firms. The list of all the firms are here:
liberatedstocktrader.com - Sp companies

The market cap ranges from $4 billion upwards so they are all what is generally called mid cap - and upper mid cap at that - and of course large cap. There are no small cap stocks whatsoever.

Conventional thought: If you hold an equal weight index such as RSP then you effective have what you want. This is because of the distribution tail of market cap weighting - only a few of the 500 dominate the index because of such enormous market caps, and then the stocks ranked 100-500 have much less variation in their market cap. So an equal index has 5x more exposure to the firms ranked 100-500 compared to the firms ranked 1-100.

On more reflection: The ETF with symbol YPS will allocate in proportion to the inverse of the market cap. This idea *definitely* economically strange, but is interesting from a mechanical perspective. Why do I wrote economically strange? It is because both equal weight and cap weight have their own sensible rationale; the former has you invested in approx. proportion to actual sales and activity quantity - double the size of what you are owning and you roughly double the amount you own - this also means less trading inside the ETF - the allocations remain at the target, by definition, as the quotes change. In the case of the equal weight, you might treat each business as risky regardless of size - you might not view a company ten times larger as ten times less risky. So in this sense it has a rationale, though very different.

But an inverse market cap weighting - now that is exotic. At first approximation it is simply an upper mid cap index fund as most of what you own is in the $4b to $20b range, end of story.

Thinking about it though, there is at least one line of merit for such an ETF - and that is the effect of the trading mechanics. As a stock declines, an equal weight index buys more of it, but only subtly. The effect is pretty mild. However with an inverse marker cap weighting, as a stock declines by 50%, you don't only purchase that 50% back but your target allocation doubled, so you actually purchase back 150%. Likewise a stock rising by 100% or more causes it to rapidly be removed from the portfolio.

They have not been around for long. It would be interesting to do a back on such a ETF. Start with the top 500 firms, then purchase them in proportion to the inverse of their market cap, with rebalancing annually. I have a feeling it would outperform the ordinary mid cap ETF (its closest kin) but I would need to run a test. Anyone?

- Manlobbi