, but here is a brief summary:
Since all these funds invest in the same underlying equities, it should be no surprise that the correlation of daily returns is generally very high – over95% - for the year to date.
The one exception is the equal-weight sector fund, most likely due to its much higher representation of the volatile Materials sector,as noted above.
The dispersion of returns for the five ETFs listed above and the “regular way” S&P 500 fund SPY is fairly wide.
The SPY is up 4.2% since the beginning ofthe year; the RSP (equal weight) is up over twice as much at 8.6%. The other funds are clustered at 4.4% to 5.5%, but every single “alternative” approach hasbested the original index thus far in 2010.
Performance is not the only relevant factor, of course.
Risk, which we measure as the standard deviation of daily returns, also plays a role in investmentdecision-making.
In the attached chart you can see that the different alternative ETFs offer either lower risk for the same return as the SPY (EPS weighting) or higher returns for the same risk as the index (Revenue weighting).
That outlier performance of the equal-weighted RSP is the result of incremental risk-taking - but not very much, really.
For less than 20% more risk youhave been able to essentially double your returns so far into the year. While we don’t show it here, pull up a chart of RSP versus SPY and you will see that for2010 the RSP spent less time down on the year and, as noted, has done much better than its market-cap weighted competition. The final chart shows that smalland mid cap names have far outstripped the large cap S&P 500 in 2010. No surprise, therefore, that equal weighting makes such a difference versus the market-cap approach.
I am not ready to say that we should ditch market cap weighting altogether, but the data here is certainly a case study in how to consider portfolio composition.
The same stocks, assembled in different ways, yield very different outcomes.