Equal Weight or Market Cap. Weight?

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pmjohn
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Equal Weight or Market Cap. Weight?

Post by pmjohn »

Hi, This is not really a new topic as I know that it has been discussed in the past. I would just like to know if there has been any new thinking on the idea of investing in a market cap. weighted total stock market such as Vanguard Total Stock Market Index Fund vs the total stock market in an equal cap weighting achieved by a fund such as Guggenheim S&P Equal Weight ETF (RSP), or Guggenheim Russell 2000 Equal Wt. ETF. I realize that these are all different indexes but they do correlate closely. The heart of the question is whether the equal weighting performs any better than market cap weighting. Should one decide towards equal weighting could you purchase a Vanguard small cap fund in addition to the Total Stock Market Index Fund to achieve that goal? Thank you. Paul
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grabiner
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Re: Equal Weight or Market Cap. Weight?

Post by grabiner »

The problem with equal weighting is that it is expensive to maintain; the equal-weighted fund needs to rebalance every time prices change to keep an equal weight.

An equal-weighted index has more of the smaller stocks than a cap-weighted index does. Therefore, if you are considering an equal-weighted index, you can get a similar effect by holding more of an index containing smaller stocks; the expenses, turnover costs, and tax costs are likely to be lower. Instead of an equal-weighted S&P 500 index, hold a small amount in a large-cap index and a larger amount in a mid-cap index. (The S&P 500 is nominally a large-cap index, but its smaller stocks are mid-caps.)
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robertalpert
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Re: Equal Weight or Market Cap. Weight?

Post by robertalpert »

I recently found this thread about equal weight being "no free lunch" because the increase return includes increased beta risk: http://www.bogleheads.org/forum/viewtop ... &p=1683354

Using cap-weight versus tilting to small versus Alternative weighting schemes: {equal-weight, dividend-weight, earnings-weight, book-value-weight, and a few others} Each has their own "simplifying assumptions" but at a cost (expense ratio; increased turnover; bid-ask-spread).

I use cap-weighted Vanguard funds with some tilt. But for a good starting point, there are some good resources here:

http://www.bogleheads.org/wiki/Getting_Started
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pmjohn
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Re: Equal Weight or Market Cap. Weight?

Post by pmjohn »

Thank your or the responses to my inquiry. After viewing the links, and seeing that the VG Total Stock Market Index is >70% Large Cap., I think that I would like to tamper with history a bit and a little "tilt" to the small and/or med cap mix. I am curious as to whether others have say for example combined VG Total Stock Market with a smaller holding of VG Small-Cap Value Index Fund to obtain a low cost "tilt." I realize that the enemy of "good" is "better" but I have a hard time just leaving things (the simple portfolio) alone. Thank you again. Paul
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Taylor Larimore
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Tilting ?

Post by Taylor Larimore »

pmjohn wrote:Thank your or the responses to my inquiry. After viewing the links, and seeing that the VG Total Stock Market Index is >70% Large Cap., I think that I would like to tamper with history a bit and a little "tilt" to the small and/or med cap mix. I am curious as to whether others have say for example combined VG Total Stock Market with a smaller holding of VG Small-Cap Value Index Fund to obtain a low cost "tilt." I realize that the enemy of "good" is "better" but I have a hard time just leaving things (the simple portfolio) alone. Thank you again. Paul
pmjohn:

These returns* for various styles and various periods ending 6-30-00 may help you leave your "simple portfolio" alone:

Style.......1 Yr...3 Yrs.....5 Yrs...10 Yrs...15 Yrs.

LCG......27.19...27.04....24.98...17.85....17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21....8.74.....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG......55.14...24.42..20.86....17.12....15.64
SCB......17.77...10.08...15.30...13.03.....12.02
SCV......3.29....3.55....12.58..11.80.....11.34

* Source: Morningstar

Past performance does not forecast future performance.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
robertalpert
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Re: Equal Weight or Market Cap. Weight?

Post by robertalpert »

Depends on you. Your need for increased risk; Capacity to weather a down-turn and keep on same path; Size of portfolio; .....
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pmjohn
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Re: Equal Weight or Market Cap. Weight?

Post by pmjohn »

Why is the MStar stat of LCB return (10year) - 17.85% whereas the Total Stock Market Index (VTSAX) return "only" 8.14%? Shouldn't they be essentially the same? Thank you. Paul
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Re: Equal Weight or Market Cap. Weight?

Post by nisiprius »

Ignore past performance.

Ignore the drumbeat of attacks that "everyone" is making on cap-weighting. It is being made because Vanguard sort of has that market sewed up--there isn't a lot of money to be made creating new cap-weighted index funds in major broad indexes. So that everyone and their brother is pushing absolutely everything but equal weighting. It's just a way of trying to distinguish their products and avoid commoditization.

Ignore spin in either direction. Ignore claims that cap-weighting is "tilted" toward big companies.

Spend some time, a reasonable amount of time, trying to figure out for yourself exactly what it is that cap-weighting does and exactly what it is that equal-weighting does, and which of them is what you want to pursue. Do spend some time examining the proposition that equal-weighting is just an sloppy and imprecise way of creating a small or value tilt.

Don't reject cap-weighting until you can state in your own words, what are the special properties that financial economists attribute to "the market portfolio."

Don't forget that while there is a vociferous crowd attacking cap-weighting as favoring big companies, there is also a vociferous crowd advocating dividend-paying blue chips--that is to say, advocating favoring big companies.

Don't ignore costs.

Don't ignore risks.
Last edited by nisiprius on Sun Nov 24, 2013 9:55 am, edited 1 time in total.
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Phineas J. Whoopee
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Re: Equal Weight or Market Cap. Weight?

Post by Phineas J. Whoopee »

I'm not aware of any "new thinking," but I've noticed a lot of new advertising.
PJW
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Taylor Larimore
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Re: Equal Weight or Market Cap. Weight?

Post by Taylor Larimore »

pmjohn wrote:Why is the MStar stat of LCB return (10year) - 17.85% whereas the Total Stock Market Index (VTSAX) return "only" 8.14%? Shouldn't they be essentially the same? Thank you. Paul
Paul:
I believe the "8.14%" return you quoted is the current 10-year return for Total Stock Market Index Fund. The "17.85%" return was the 10-year return back on June 30, 2000.

Best wishes.
Taylor
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Re: Tilting ?

Post by abuss368 »

Taylor Larimore wrote:
pmjohn wrote:Thank your or the responses to my inquiry. After viewing the links, and seeing that the VG Total Stock Market Index is >70% Large Cap., I think that I would like to tamper with history a bit and a little "tilt" to the small and/or med cap mix. I am curious as to whether others have say for example combined VG Total Stock Market with a smaller holding of VG Small-Cap Value Index Fund to obtain a low cost "tilt." I realize that the enemy of "good" is "better" but I have a hard time just leaving things (the simple portfolio) alone. Thank you again. Paul
pmjohn:

These returns* for various styles and various periods ending 6-30-00 may help you leave your "simple portfolio" alone:

Style.......1 Yr...3 Yrs.....5 Yrs...10 Yrs...15 Yrs.

LCG......27.19...27.04....24.98...17.85....17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21....8.74.....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG......55.14...24.42..20.86....17.12....15.64
SCB......17.77...10.08...15.30...13.03.....12.02
SCV......3.29....3.55....12.58..11.80.....11.34

* Source: Morningstar

Past performance does not forecast future performance.

Best wishes.
Taylor
Thank you Taylor!
John C. Bogle: “Simplicity is the master key to financial success."
steve_14
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Re: Tilting ?

Post by steve_14 »

Taylor Larimore wrote: These returns* for various styles and various periods ending 6-30-00 may help you leave your "simple portfolio" alone:

Style.......1 Yr...3 Yrs.....5 Yrs...10 Yrs...15 Yrs.

LCG......27.19...27.04....24.98...17.85....17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21....8.74.....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG......55.14...24.42..20.86....17.12....15.64
SCB......17.77...10.08...15.30...13.03.....12.02
SCV......3.29....3.55....12.58..11.80.....11.34
Great post. I continue to be perplexed by how many "value" or "growth" posts I see on this board.The future's unknown - be smart and own the whole market.
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Re: Equal Weight or Market Cap. Weight?

Post by Bogle101 »

I will reiterate what everyone else has posted, no one knows the future and the proven best course of action is typical indexing. Equal weight is just a repackaged way of tilting ones portfolio to mid and small caps. If you believe that those smaller companies will give you a better return than the large caps, then go for an equal weight index fund. But beware that this will increase the "riskiness" of your holdings, because historically mid and small caps have been a more volatile asset class
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Re: Tilting ?

Post by abuss368 »

steve_14 wrote:
Great post. I continue to be perplexed by how many "value" or "growth" posts I see on this board.The future's unknown - be smart and own the whole market.
Me too. I am guessing that is more in line with the strategy of the DFA research?
John C. Bogle: “Simplicity is the master key to financial success."
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