What Drives The S&P 500 Equal-Weight Premium? Size AND Value

by: Alpha Architect

by Wesley R. Gray, Ph.D.

First, a detailed analysis of the S&P 500 equal-weight index against the S&P 500 value-weight index from Jan 1963 through September 2013:

  • The equal-weight S&P 500 generates 270bps over the value-weight index.
  • HML, the size-adjusted "value factor", generates a nice CAGR spread of 4.27% (link).
  • SML, the value-adjusted "value factor", generates a nice CAGR spread of 2.54% (link).

What drives the spread?

Many people assume the spread between EW and VW is a size premium, but this doesn't tell the entire story. Review the Asset Pricing Model module above (key stats highlighted).

This analysis represents the beta estimates for a variety of asset pricing models, which are used to control for different exposures on a portfolio. Rm-rf is the market-risk free spread; SMB is a L/S spread that captures small-stock exposure; HML is a L/S spread that captures value-stock exposure; and MOM is a L/S spread that captures momentum exposure.

Here is an explanation of how to calculate the various beta/alphas:

The S&P 500 EW index has a fairly large exposure to the "value factor," which suggests that the spread is driven by size, but also value! There is also a beta of 1.1, suggesting a slightly higher beta. Below we look at the same analysis, but for the S&P 500 index. There is a beta of 1 (makes sense), a negative size factor (i.e., the value-weight index tilts large), and a roughly flat value exposure.

On net, there is an approximate .32 point increase in the SMB beta and a .31 point increase in the HML beta between EW and VW S&P 500. A casual interpretation of these results is that the premium for the EW S&P 500 index is partially driven by a size premium, but also driven by a value premium.

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