CKBlog: The Market

Wednesday, March 03, 2021

The S&P 500 Index is Underperforming Itself

by Steve Haberstroh, Partner

The market capitalization weighted S&P 500 index (red) has been underperforming the S&P 500 Equal Weight index (green).
CastleKeep’s CIO, Charles Haberstroh, sent our team an email yesterday pointing out an interesting dynamic that has taken place in the market over the last six months. The market capitalization weighted S&P 500 index (red) has been underperforming the S&P 500 Equal Weight index (green).

What does this mean?

The S&P 500 is a market-weighted index. In short, this means that larger companies (by market capitalization) have more weighting (and therefore more influence) than smaller companies within the index.

As an example, Apple currently sports the largest market cap in the US representing 6% of the standard S&P 500 index. The smallest member of the S&P 500, News Corp, represents just 0.01% of the index.

If News Corp doubled in price today, you’d never notice as it would only push the index higher by a negligible 0.01%. If Apple doubled, however, your S&P ETF would be up roughly 6% (assuming the rest of the index was flat of course).

Turns out, size matters.

Investors may also choose to invest in the Equal Weighted S&P 500. With this version, each of the 500 members within the S&P 500 index maintain the same weighting in your portfolio. A $10,000 investment in this fund means at any given point you would own approximately $20 of each company (O.2%). This way, the largest components don’t have any more influence than the smaller components.

The standard index has worked great over the last 10 years as tech behemoths like Apple, Microsoft, Amazon and Facebook have performed so well (and have become an ever-increasing piece of the S&P 500 pie). But what happens if they cool off?

Well, they have. As you can see above, the Equal Weight version of the S&P 500 index has beaten the market weighted version by 10% over the last six months.

If you’ve been a big believer in “just owning the index,” make sure you know which one you own. If your choice continues to be the market weighted version (which is by far the most common choice), just know you are making a big bet that tech giants will continue to eat more share of the S&P 500 pie.