In early October of 2011, U.S. economic data appeared bleak. The sovereign debt crisis in Europe seemed perilously similar to the sub-prime mortgage catastrophe. And U.S. stocks via the S&P 500 struggled to maintain a grip on the 1100 level.
Six months later, analysts are tripping over themselves to describe the U.S. economy in extremely positive terms. European recession fears have yet to alter the perception that the U.S. is well-insulated. And the S&P 500 has had a fairly easy time of holding onto a psychological spot of 1400. (For now.)
Granted, the S&P 500 itself has risen roughly 28% in a mega market-cap weighted move. Yet increasingly, different index weighting methodologies are giving alternatives to ETF investors. Dividend-weighted, fundamental weighting, equal-weighted, earnings-based and even risk weighting have been challenging the traditional market-capitalization approach.
With the bull possessing a frothy head of steam over the prior six months, I wondered which orientation might lay claim to “Best Performing ETF.” Here are the percentages for a variety of large-cap U.S. stock trackers where each employs a distinct indexing method for capturing exposure to S&P 500 corporations:
|Unique Indexing Approaches In The 6 Month Rally (Through April 3)|
|Weighting||6 Month %|
|PowerShares S&P 500 High Beta (SPHB)||Volatility||43.4%|
|Rydex S&P 500 Equal Weight (RSP)||Equal||31.0%|
|WisdomTree Earnings 500 (EPS)||Earnings||30.7%|
|S&P 500 SPDR Trust (SPY)||Market Cap||29.2%|
|First Trust||Large Core||AlphaDex||(FEX)||Fundamental||28.4%|
|PowerShares Fundamental Large Core(PXLC)||Fundamental||24.0%|
|PowerShares S&P 500 Low Volatility (SPLV)||Volatility||17.5%|
It may not come as a monumental surprise that different approaches to S&P indexing led to unique results. That said, it is intriguing to note the nature of the six-month bull run off the October bottom.
For example, Rydex S&P 500 Equal Weight (RSP) weights every company in the S&P 500 equally, which effectively means smaller companies will be weighted higher than they would in a market-cap tracker like S&P 500 SPDR Trust (SPY). It follows that smaller corporations helped push RSP to roughly 200 basis points more in unrealized gains than SPY at the time of this writing.
Smaller companies are not the only ones to benefit from “risk-on” run-ups. The most volatile, highest beta sectors of the economy (e.g., technology, financials, materials, consumer discretionary, etc.) helped PowerShares S&P 500 High Beta (SPHB) trounce PowerShares S&P 500 Low Beta (SPLV), the representative of the low beta sectors (e.g., utilities, staples, health care, etc.).
Fundamentally-weighted index trackers may have slightly underperformed due to the nature of the bullishness; that is, the move has been somewhat indiscriminate. One might say that stock picking and “great value” had little to do with why the asset class caught a strong wind behind its back.
With the next six months less likely to be as one-directional, let alone as serene, don’t be shocked if low beta and fundamental trackers pick up ground. What’s more, if your goal for stocks is as much about the cash flow as it is is about the ”cap app,” then you may even prefer the less volatile approach of PowerShares S&P 500 Low Volatility (SPLV).
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.