Summary
It is over 20 years since S&P Dow Jones Indices launched the S&P 500 Equal Weight Index; since then, its live performance has attracted both academic interest and investor capital in related products. To mark the anniversary, we re-examine the index’s potential as a benchmark for actively managed U.S. equity mutual funds. Using 20 years of live performance, we show:
- The annual excess returns of the average actively managed Large-Cap Core U.S. equity fund (relative to the S&P 500) were correlated to those of the S&P 500 Equal Weight Index.
- Over the long term, in every major category, nearly all actively managed domestic U.S. equity funds underperformed the S&P 500 Equal Weight Index.
- These results would not be substantially altered after accounting for the typical frictions that might be associated with a passive investment tracking the S&P 500 Equal Weight Index.
Introduction
Offering a simple alternative to the standard capitalization-weighted approach for U.S. blue-chip equities, the S&P 500 Equal Weight Index began publication just over 20 years ago on Jan. 8, 2003. The index’s performance since launch has been notable, with a total return not only higher than its large-cap benchmark index, but also higher than S&P DJI’s benchmarks for mid- and small-cap U.S. equities, as well as both growth and value indices based on the S&P 500 (Exhibit 2).
This outperformance offers a challenging perspective on the results reported in S&P Dow Jones Indices’ SPIVA® Scorecards, which have consistently shown that a high proportion of actively managed U.S. equity mutual funds underperform capitalization-weighted benchmarks. “Challenging” because—as we shall illustrate—actively managed large-cap equity funds might be expected to benefit during periods when equal-weight indices outperform cap-weighted indices.
