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EQUAL-WEIGHTING CONTINUES TO BEAT CAP-WEIGHTING

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The S&P Equal-Weight Index (SPEWI) was developed by Rydex Fund Group in collaboration with Standard & Poor's. It is composed of the 500 stocks in the S&P 500 Index (SPX), but each stock In the SPEWI carries an equal weighting (rebalanced quarterly) versus the cap-weighting of the SPX. (The cap-weighting of the SPX results in the 50 stocks with the highest market capitalization carrying about 70% of the entire SPX weighting.)

The SPEWI trades as an ETF (Exchange Traded Fund) named Rydex S&P Equal Weight ETF with the symbol RSP. Note, it is not a mutual fund in the Rydex Group -- it trades like a stock. I continue to cover this stock because it continues to illustrate how much better equal-weighted portfolios can perform.

Since the 2000 market top, RSP has out-performed the SPX, with the exception of the final leg of the bear market in 2002. It lost only 40% during the entire bear market versus 50% for the SPX. Since the 2002 low, RSP has gained about 75% versus only 50% for the SPX. And, more important, RSP moved to new, all-time highs at the end of 2003, while the SPX is still well off its 2000 peak.

While recent RSP performance has been superior, the relative strength line at the bottom of the chart tells us that it lagged the SPX from 1994 to 2000. I think this was probably caused by the increasing popularity of indexing during that period, which would have caused an unusually high demand for the high-cap stocks in the SPX.

Watching the relative strength line, which is RSP divided by the SPX, will tell us when a shift back to large-cap stocks is taking place, but, as long as the relative strength line is rising, RSP will be a better bet than the SPY (the ETF that tracks the S&P 500).

Decision Point has a series of indicators derived from the S&P 500 stocks, and virtually without exception, these indicators are themselves unweighted, which makes them much more useful with RSP than with the SPX. Subscribers should check the Straight Shots section of the DecisionPoint.com Main Menu.

Chip Anderson
About the author: is the founder and president of StockCharts.com. He founded the company after working as a Windows developer and corporate consultant at Microsoft from 1987 to 1997. Since 1999, Chip has guided the growth and development of StockCharts.com into a trusted financial enterprise and highly-valued resource in the industry. In this blog, Chip shares his tips and tricks on how to maximize the tools and resources available at StockCharts.com, and provides updates about new features or additions to the site. Learn More
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