No. of Recommendations: 5
Below are the 3-year, 5-year, and 10-year performance of RSP vs SPY. As you can see, a regular cap-weighted ETF or index fund has beaten an equal-weight ETF during each of these periods.
All of the periods you mention are ending right now. So it's really just one data point.
One could view that set of number as just saying that "really big companies just had one of their occasional good stretches".
But that isn't usually the case.
Equal weight has beat cap weight in 68.0% of rolling five year periods since 1930, and 65.9% of rolling five year periods since RSP started trading in May 2003.
Despite the well publicized wonderful results of the tech giants in the last few years, the equal-weight guy since '03 has beat the SPY guy by 0.53%/year.
If you'd done the same comparison since '03 at end Feb this year, the advantage for equal weight would have been 1.33%/year for just under 20 years.
And that's with a tiny fraction of the company-specific risk: the top two companies in SPY account for 14.62% of your capital allocation. In the equal weight they account for 0.4%.
So, yeah, other than the higher returns and the lower risk, the equal weight approach is a terrible idea : )
Jim
