Homepage / Investment / In ETFs, the bigger the stock, the more money goes into it and that could be costing regular investors
Thai rescue mission diver mulls legal action after Elon Musk calls him 'pedo guy' Trump claims US-Russia relations have ‘never been worse’ shortly before Putin meeting China will be watching and learning as Trump meets Putin Amazon Prime Day threatened by strikes at European warehouses over working conditions While Trump meets Putin, China is reaching out to Europe Trump-Putin summit could provide a ‘significant breakthrough’ on Syria, strategist says How cryptocurrency start-ups have raised over $12 billion this year via a much-hyped funding route For Asia's soccer teams to succeed, work starts off the field European markets seen higher ahead of earnings; Trump-Putin meeting in focus How start-ups are positioning healthy food to make 'a lot of business sense' 'Never underestimate human stupidity,' says historian whose fans include Bill Gates and Barack Obama China says its second-quarter GDP growth was 6.7%, meeting expectations Asian stocks poised for slightly softer open as markets await China data Elon Musk courts new controversy after tweeting, then deleting, an attack on a British cave explorer How a former eBay employee is inspiring kids to become tomorrow's problem solvers Here's what the DOJ needs to happen to win its appeal against AT&T The 2018 Hyundai Tucson is a good bargain crossover but skip the high-end model Trump suggests US and UK could strike a 'tremendous' trade deal after Brexit PlayVS wants to bring electronic sports gaming into high schools The unintentional winners of Prime Day: Amazon’s competitors Elon Musk insists he's neither Democrat nor Republican, as political contributions come under fire Amazon could make a big impact in health by helping people eat better Even without a GPS, here's why mobile phones are 'the best spying device you can imagine' How the Bee Gees plan to stay alive in the era of digital music Verizon, AT&T, Sprint and T-Mobile say they have unlimited data plans, but here's the fine print Elon Musk has a new interest group that could be added to his list of enemies: Cabbies Uber's troubled culture persists, as sensitivity 'blind spots' raise new questions Top VC Deals: Uber and Alphabet backed Lime, Larry Page invests in personal aircraft company Tesla rolled out a new attendance policy for hourly workers this month — read it here Elon Musk: Whatever pain Tesla factory workers felt, 'I wanted mine to be worse' Facebook, Google and Twitter will testify next week at a House Judiciary hearing on content moderation In ETFs, the bigger the stock, the more money goes into it and that could be costing regular investors Ex-Labor secretary: Cash handouts 'may seem like a pipe dream' but could be 'inevitable' Cisco, networking stocks drop on a report Amazon Web Services is developing its own network devices Microsoft's president says the government needs to step up regulation of face recognition technology Facebook admits it's not adding enough minority engineers, says the problem may lie with its roots The 2018 Cadillac ATS-V is one of the best sports sedans you can buy There’s one media stock that’s outperforming Netflix Trump's SCOTUS nominee thinks ISPs have First Amendment rights, which could hurt privacy laws The bond market is sounding an alarm on the economy as 'yield curve' spread hits narrowest in 11 years on Friday India execs raise concerns about potential trade war with US Watch out, retailers. This is just how big Amazon is becoming Jefferies raises Facebook price target, sees revenue topping expectations An Amazon Prime Day for health care? Here's what experts say it could look like Can money buy success at the World Cup? Children and PTSD: Health risks linger long after acute psychological trauma ends Netflix faces major risk heading into earnings, money manager says Morgan Stanley raises its price target on red hot WWE stock by nearly 70% to Street-high Trump walks back Brexit threat: 'Whatever you do is OK with us' 4,500 tech workers, 1 mission: get Democrats elected Watch: Trump holds news conference with UK Prime Minister Theresa May after he attacked Brexit plan Goldman Sachs says cybersecurity stocks could get a boost from fears of meddling in the midterm elections AT&T's Randall Stephenson says chances of a successful DOJ appeal are 'remote': 'This changes nothing' PNC shares gain after higher commercial lending leads to better-than-expected earnings report Amazon just hit a new high, and one trader sees more to come Stocks making the biggest moves premarket: JPM, DIS, BLK, T, JNJ, MCD & more Deutsche Bank warns Netflix may miss second-quarter subscriber expectations Wells Fargo shares fall after second-quarter revenue misses estimates Trump’s dream to meet the queen makes this trip a victory, former White House aide says In this earnings season, a volatile stew of expectations London mayor says the UK is not afraid to call out Trump: ‘We think you’re wrong’ ‘Trump Baby’ balloon takes flight in central London amid protests Even May's UK opponents are backing her against Trump Theresa May had a plan in place for Brexit. Then Donald Trump landed Jack Dorsey loses 200,000 followers on Twitter after fake user purge Trump to have tea with the queen at Windsor Castle The US is trying to nail down terms with Pyongyang, while 'South Koreans aren't wasting time' Trump is likely to ask Putin for help with his North Korea problem European markets seen higher amid global trade war fears; Trump visits the UK History shows the US-UK special relationship is increasingly one-sided New tariffs threatened by the US would be more harmful to China than the first batch, says bank CEO Chinese imports fall short of expectations, while exports top estimates China says both its imports and exports with the US rose in the first half of the year Asian stocks extend gains amid relief over lack of trade escalation, tracking US rally Nvidia and Netflix produced top shareholder returns over past five years, BCG study shows Apple announces $300 million clean energy fund in China Broadcom has a new strategy after failing to buy Qualcomm: Roll up enterprise software companies Justice Department appeals Time Warner-AT&T merger approval Women in private Facebook group for cancer gene carriers found marketers could get their names How to avoid overshopping on the longest Amazon Prime Day yet Microsoft challenges Slack with a free tier for Teams Amazon, Xealth working on pilot program to deliver products to patients after hospital discharge Trump's tariffs are unlikely to cause a recession because they are leaving the most important part of the economy alone There are a lot of misconceptions about browsing the web in 'incognito' mode, researchers say How an obscure British rule — the 'chain principle' is changing Comcast's strategy for Fox and Sky Netflix just beat out HBO in Emmy nods, snapping HBO's 18-year streak John McCain blasts Trump’s NATO performance and warns that 'Putin is America’s enemy' Two Dow stocks to buy and one to fade in a volatile market Uber will let riders pay with a Venmo balance Cramer: Pizza execs say Papa John’s is ‘falling apart’ when compared with Domino’s This 23-year-old founded a company with self-driving car tech that's giving Tesla some competition NBA Commissioner Silver ‘rooting’ for Disney in the battle against Comcast for Fox L Brands tumbles after weak sales at 'broken' brand Victoria's Secret Law firms climb aboard the AI wagon A welcome upgrade to apprenticeships A Chinese music-video app is making WeChat sweat Development-impact bonds are costly, cumbersome—and good Big corporates’ quest to be hip is helping WeWork What the UK’s top politicians have said about Trump — and it's not always nice Kim Kardashian West and Warren Buffett agree that this is the best investment you can make

Investment

In ETFs, the bigger the stock, the more money goes into it and that could be costing regular investors

Huge sums of investor cash have poured into exchange-traded funds during this past year (and during the whole bull market) with billions of dollars sitting passively in funds betting on the very largest U.S. stocks.

But new research suggests this money is betting on funds with a methodology that might not offer the best returns for the regular person over the long term.

The weighting of stocks in most major indexes, and the ETFs tied to them, are based on market capitalization, meaning that big-company components can pull the index more than the little ones. For example, a 20 percent move in Apple can shift the entire S&P 500 by more than half a percent.

An equal-weighted index, on the other hand, treats all the companies equally in terms of how they can influence the group as a whole and in many cases, offered a better return to investors over the last 20 years, according to Pablo Fernandez, a finance professor at the University of Navarra in Spain.

For example, researchers there showed that if an investor had put $100 in the S&P 500 in January 2000, the sum would be worth $252.60 in April 2018; alternatively, $2.50 invested unweighted in the largest 40 companies in the S&P 1500 would be worth $273.10 in April 2018.

That disparity grows even more pronounced as the size of the companies shrinks: $5 invested unweighted in each of the 20 smallest companies in the S&P 1500 in January 2000 would now be worth at least $36,000.

To be sure, the numbers cited by the paper may be skewed slightly since large cap technology stocks were gutted in the Dotcom bubble bust of March 2000. And the return numbers alone do not represent associated risks for each index with smaller companies sometimes being much more volatile.

Still, this debate is not a new one and it’s worth analyzing given that many of the globe’s most popular ETFs use a market-weighted methodology.

The SPDR S&P 500 ETF (SPY) — the largest ETF on the market with $261 billion in assets under management — tracks a market-cap weighted index of the S&P 500. BlackRock, the largest asset manager in the world, runs the iShares Core S&P 500 ETF (IVV), another S&P 500-tracking fund.

Investors have poured more than $17 billion into that ETF over the past year, according to FactSet fund flow data; Vanguard’s S&P 500 fund drew nearly $12 billion over the same time.

“We document that unweighted indexes have outperformed weighted indexes and that the S&P 400 and the S&P 600 have outperformed the S&P 500,” the University of Navarra researchers wrote. The S&P 400 tracks midcaps while the S&P 600 tracks small caps.

Chris Brightman of Research Affiliates says a simple equal-weighted strategy can do even better when combined with regular rebalancing.

Rebalancing is essentially trimming stocks that have outperformed and buying those that have underperformed given a historical tendency for prices to revert to an average. In essence, Brightman added, it’s betting against the current Wall Street momentum darlings in favor of stocks that have underwhelmed or scared investors.

“One can turn that mean reversion into profits by rebalancing their portfolio by selling securities that have outperformed and buying securities that have underperformed,” he added.

That strategy, the CIO said, provided about a 2-percent premium over the market over several decades.

His firm, founded by Rob Arnott, has long advocated for weighting stocks by fundamental measures to garner better passive returns than the industry norm.

“We use the fundamental index, which targets an invest amount for each company which is proportional to its fundamental size. Things like size, cash flow and dividends,” said Brightman.

To be sure, though, equal weighed indexes don’t always outperform their market weighted cousins, especially during prolonged outperformance or underperformance in isolated areas of the market. Should a select few firms (or a sector) consistently outperform, for example, each time an investor rebalances their portfolio back to equal, they could be missing out on future gains in those areas.

“You would have done terribly with your equal-weighted strategy during the 1990s, during the dotcom bubble,” Brightman said. “If you decided to present this to a board or a committee in 1995, by 1997 or 1998 you’d think you were really stupid. However, you would have dramatically outperformed the market in 2000, 2001, 2002 and 2003.”

The Invesco S&P 500 Equal Weight ETF, which replicates the performance of the equal-weighed S&P 500 index has returned 4.2 percent so far this year against the S&P 500’s 5.8 percent return. Much of that disparity is likely due to the prolonged outperformance in the larger technology stocks, which have a bigger weighting in the S&P 500.

But over the last ten years, the equal weight ETF has returned 11.8 percent annually, more than the 10.8 percent return from the S&P 500.

Source: Investment Cnbc
In ETFs, the bigger the stock, the more money goes into it and that could be costing regular investors

Comments are closed.