Investor Alert
Mark Hulbert

Mark Hulbert Archives | Email alerts

Dec. 7, 2019, 11:54 a.m. EST

There are two versions of the S&P 500 index — this is the better investment

One weights companies by market value; the other treats them equally

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Apple Inc. (AAPL)
  • X
    S&P 500 Index (SPX)
  • X
    TripAdvisor Inc. (TRIP)

or Cancel Already have a watchlist? Log In

By Mark Hulbert, MarketWatch

Sony Pictures Classics / courtesy Everett Collection

CHAPEL HILL, N.C. — Apple, the stock with the largest market capitalization within the S&P 500, is a better bet than the stock with the smallest, TripAdvisor.

But just how much better a bet is it? With a market cap of over $1 trillion, Apple /zigman2/quotes/202934861/composite AAPL -0.61% has more than 320 times the portfolio weighting in the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.34% than TripAdvisor /zigman2/quotes/206118480/composite TRIP +0.77% , whose market cap is $113 million. Is Apple really worth that much more?

Many on Wall Street say no. After all, when picking stocks for your portfolio, you have an equal chance of picking TripAdvisor as Apple. Wouldn’t the S&P 500 index be improved if it gave equal weight to all 500 stocks?

Their argument gained particular credence in the years immediately after the 2008 financial crisis, when the equal-weighted version of the S&P 500 significantly outperformed the cap-weighted version. In six of the eight years from 2009 through 2016, the equal-weighted version came out on top, as this chart shows.

Since 2016, however, the tables have turned. 2019 is shaping up as the third year in a row in which the cap-weighted version of the S&P 500 comes out ahead.

At a minimum, therefore, this just goes to show that nothing comes out on top forever. But I would argue the cap-weighted version of the S&P 500 is the better bet for long-term performance.

To understand why, it’s helpful to step back and consider what we mean when we talk about the “market.” It is nothing more than the combined value of all shares. By definition, therefore, the “market” is capitalization-weighted: A stock with a large market cap will have greater weight than one with a small market cap.

There are at least three reasons why the equal-weighted version of the S&P 500 will lag the market over time.

1. Questionable style and sector bets

When investing in the equal-weight version of the S&P 500, you in effect are making two specific style and sector bets:

• That recent winners will quickly turn into losers, and vice versa. That’s because the equal-weight version of the index is constantly selling portions of its biggest winners and buying additional shares of its biggest losers so that all holdings remain at an equal weight. Call this an anti-momentum, or contrarian, bet.

• That small-cap stocks will outperform large-caps. That’s because the smallest-cap stocks will have greater weight in the equal-weighted version than in the cap-weight version.

The historical data are clear that you should avoid the first of these two bets. According to data from University of Chicago professor Eugene Fama and Dartmouth professor Ken French, momentum wins in a big way: A portfolio of stocks that have done the best over the trailing year far outperforms a portfolio containing the trailing year’s worst performers.

It’s not even close, in fact: Over the last 92 years, momentum beat contrarianism by an annualized average of more than 7 percentage points.

US : U.S.: Nasdaq
$ 115.04
-0.71 -0.61%
Volume: 82.57M
Oct. 23, 2020 4:00p
P/E Ratio
Dividend Yield
Market Cap
$1994.49 billion
Rev. per Employee
+11.90 +0.34%
Volume: 2.16B
Oct. 23, 2020 5:15p
US : U.S.: Nasdaq
$ 20.91
+0.16 +0.77%
Volume: 2.09M
Oct. 23, 2020 4:00p
P/E Ratio
Dividend Yield
Market Cap
$2.81 billion
Rev. per Employee
1 2
This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

About Mark Hulbert

RSS News feed

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD...

Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron’s.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC’s World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What’s Working Now.

More from Mark Hulbert

  1. ‘Trump stocks’ have significantly lagged the U.S. market since 2016 — while ‘Clinton stocks’ have soared
  2. How to invest in the S&P 500 without betting hard on the ‘FAAMG’ stocks that are 20% of the index
  3. Only two other times since George Washington was president has the U.S. stock market been as far above trend as it is now
  4. Donald Trump would want this baseball team to win the World Series
  5. How to celebrate National Retirement Security Week
Link to MarketWatch's Slice.