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Oct. 8, 2016, 11:45 a.m. EDT

How a more balanced S&P 500 can lead to richer returns

Equal-weight S&P 500 beats the traditional index

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By Anora Mahmudova, MarketWatch

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Equal-weight indexes have their benefits.

The Sage of Omaha, Warren Buffett, famously recommended that his children put their inheritance into an S&P 500 index fund rather than invest in his Berkshire Hathaway enterprise. His thinking: It’s hard to beat the market.

Buffett is right, of course. Few fund managers are able to consistently outperform their equity benchmarks.

But investors need not despair. There are ways to beat the S&P 500 /zigman2/quotes/210599714/realtime SPX -2.01% , though it requires higher risk tolerance and patience.

Read: Bucket of cold water dumped on this hot investing strategy

One method is by investing in the equal-weighted S&P 500, or EWI, which over the long term has significantly outperformed the S&P 500.

Since inception in 2003, the average S&P EWI total return of 13.4% handily beat the 10.2% return of the S&P 500. And buying and holding it since 2003 would have nearly quadrupled returns, as the chart below illustrates.

A new entrant in the equal-weight category, which launched in April of 2015, is the no-load index fund based on the equal-weighted S&P 500 (Index Funds S&P 500 Equal Weight), with a convenient ticker INDEX /zigman2/quotes/200371962/realtime INDEX -1.54% .

The fund has about $4 million under management, but aspires to grow assets to $1 billion over the next 18 months as its hopes investors flock to passively managed funds over their actively managed peers, says Michael Willis, president and lead portfolio manager at Index Funds.

Willis is wagering that the equal-weighted fund will gain traction over the next decade thanks to a new Labor Department fiduciary rule that requires financial advisers to operate in the best interests of clients. According to Morningstar, new standards for financial advisers serving retirement accounts could send $1 trillion in new assets to passive index funds, as studies have shown that low-cost passive funds outperform actively managed ones over the long term once fees are factored in.

“The equal-weighted space is like a blue ocean—there is very little competition. And when the trillion-dollar tsunami hits we want to be on the front line,” Willis said.

Unlike the cap-weighted S&P 500, the EWI, which INDEX tracks, assigns an equal weight of 0.2% to each of the 500 companies in the S&P 500.

According to Willis, rebalancing the portfolio of 500 stocks each quarter to its original weight level, as the INDEX does, ensures that investors are adding stocks that have fallen in price and selling stocks whose prices appreciated.

Thus, the mechanism of the equal-weight index embeds the ‘buy low, sell high’ strategy.

By contrast, the S&P 500 index, which is weighted by the value of a company’s total shares outstanding, assigns a proportionate weight to each of its constituents, with giants like Apple Inc. /zigman2/quotes/202934861/composite AAPL -2.98% , holding the greatest influence on the index.

-78.56 -2.01%
Volume: 2.23B
June 28, 2022 4:20p
US : U.S.: Nasdaq
$ 40.82
-0.64 -1.54%
Volume: 0.00
June 28, 2022
US : U.S.: Nasdaq
$ 137.44
-4.22 -2.98%
Volume: 66.92M
June 28, 2022 4:00p
P/E Ratio
Dividend Yield
Market Cap
$2292.79 billion
Rev. per Employee
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