Russell 1000 Equal Weight Index

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Gaston
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Russell 1000 Equal Weight Index

Post by Gaston »

I am not a proponent of equal weight indices, but I stumbled across the Russell 1000 Equal Weight Index and found it interesting that this index calculates its equal weights in two stages. As described in the attached fact sheet: "Rather than simply assigning an equal weight to each constituent of the index, Russell's industry equal weight index methodology equally weights each industry within the index, and then equally weights the companies within each industry."

As the fact sheet also notes, over the last 5 years (yes, I know, not a very long horizon) the Equal Weight index has underperformed the Russell 1000 capitalization-weighted index.

https://research.ftserussell.com/Analyt ... d1417b.pdf
alex_686
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Re: Russell 1000 Equal Weight Index

Post by alex_686 »

Gaston wrote: Thu Aug 04, 2022 8:59 am As the fact sheet also notes, over the last 5 years (yes, I know, not a very long horizon) the Equal Weight index has underperformed the Russell 1000 capitalization-weighted index.
I would put zero weight on the information in the last sentence. Two different indexes generate different returns over a arbitrary time period. Is this due to the poor construction of the index, luck, randomness, specific situations, riskiness, etc. Now, I have a pretty low opinion of equally weighted indexes since I find the underlying theory to be lacking.
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Taylor Larimore
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Re: Russell 1000 Equal Weight Index

Post by Taylor Larimore »

Gaston wrote: Thu Aug 04, 2022 8:59 am I am not a proponent of equal weight indices, but I stumbled across the Russell 1000 Equal Weight Index and found it interesting that this index calculates its equal weights in two stages. As described in the attached fact sheet: "Rather than simply assigning an equal weight to each constituent of the index, Russell's industry equal weight index methodology equally weights each industry within the index, and then equally weights the companies within each industry."

As the fact sheet also notes, over the last 5 years (yes, I know, not a very long horizon) the Equal Weight index has underperformed the Russell 1000 capitalization-weighted index.

https://research.ftserussell.com/Analyt ... d1417b.pdf
Bogleheads:

Mathematics proves that a total market index is the most "efficient" (highest return with equal risk):

Three Proofs that TSM is efficient

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nisiprius
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Re: Russell 1000 Equal Weight Index

Post by nisiprius »

In other words, it's bait-and-switch.

It is not, in fact, equal weighted at all. Not even close.

And whatever rationale someone might have for equal weighting does not apply.

It smooth-talks its way past the problem in the disarming phrase "Rather than simply assigning an equal weight to each constituent of the index..." The obvious response is "Stop right there. Why not do just that?"

In an equal-weighted S&P 500 fund, all constituents receive 0.2% weight. In this one, according to the factsheet, every one of the top ten constituents is weighted more than twice as much as they are in the equal-weighted S&P. And the largest constituent, at 0.53%, is weighted eight times as much as the smallest, at 0.06%

You can't find any rationale for that beyond "it's our methodology" and "this is what the past performance has been."

Even if it were equal weighted, it still wouldn't make sense. Because it means you would be putting a weight of 0.1% on 1,000 stocks, and a weight of exactly zero on the other 3,000. That's not "equal," and it also isn't a good representative coverage of the equal-weighted stock market.

Unlike the situation with cap-weighting, in which the Russell 1000 covers 93% of the stock market by cap weight and is thus a decent approximation of the market as a whole, a truly equal-weighted Russell 1000 holding would only cover 25% of the equal-weighted stock market and would not be a good approximation to the equal-weighted stock market as a whole.
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nisiprius
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Re: Russell 1000 Equal Weight Index

Post by nisiprius »

EQAL is an ETF that tracks the Russell 1000 "Equal Weight" Index. I'm using it as a way to view the constituents and weightings of the Russell 1000 Equal Weight index.

If you have $1,000,000 to invest, and you think it's appropriate to invest equal amounts in every stock because you just don't know... why do you think it's appropriate to do what EQAL does, which is to invest $910 in Masimo Corp, $700 in Apple Inc. and nothing at all in Shake Shack Inc?

If Masimo is just as worthy as Apple, why isn't Shake Shack just as worthy as Masimo?

Equal weighting does not make logical sense unless you can include a high percentage of the stock market by name. If the goal is "cap weighting the whole market," you can get away with just 500 or 1000 stocks. If the goal is "equal weighting," you need to include a higher percentage of all 4,000 stocks or so--say, 3,600 of them, 90%--if you want a reasonable approximation of your goal.
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heyyou
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Re: Russell 1000 Equal Weight Index

Post by heyyou »

Equal weighting is attractive to those who fear the future of the most popular mega-caps, so we see a fund business marketing to those potential customers. I'm sure it back tests well. :)

I will just muddle through with my current index allocations, adjusting my annual spending amount to help my portfolio longevity--
because I can.
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Gaston
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Re: Russell 1000 Equal Weight Index

Post by Gaston »

heyyou wrote: Thu Aug 04, 2022 11:27 pm Equal weighting is attractive to those who fear the future of the most popular mega-caps, so we see a fund business marketing to those potential customers.
Yup. It's just kind of interesting to see all the concoctions that purveyors of indices and funds come up with. I'm waiting for the day when there is an index that weights companies based on the number of vowels in their names, perhaps based on the assumption that vowels yield higher returns than consonants.
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bearhattan
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Re: Russell 1000 Equal Weight Index

Post by bearhattan »

I wouldn't be so sure TSM has proven to be efficient.

Unfortunately academics don't collaborate very well across disciplines (and don't seem to incentivized to).

Serious mathematicians have looked at models that fit observed behavior and not starting from the economic arguments we've all heard so much of.
This theory (Stochastic Portfolio Theory) is descriptive, as opposed to normative; it is consistent with observable characteristics of actual portfolios and markets; and it provides a theoretical tool which is useful for practical applications.
Mathematicians are seriously inferior at popularizing their work - or even in making it digestible at all.

But that's not to say it should be dismissed. (Even if other disciplines do.)

Here's a sample
https://papers.ssrn.com/sol3/papers.cfm ... id=3608632

And I dunno. I'll take the other side. It's not at all intuitive to me why it's optimal at market cap weights. The real world is finite; things can't grow proportionally forever.
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Re: Russell 1000 Equal Weight Index

Post by grabiner »

Taylor Larimore wrote: Thu Aug 04, 2022 10:54 am Bogleheads:

Mathematics proves that a total market index is the most "efficient" (highest return with equal risk):

Three Proofs that TSM is efficient
This article doesn't mean what you might think it does; you have to check the definitions in the paper.

The paper proves, given certain modeling assumptions, that it is impossible for any all-stock portfolio to have a higher expected return with lower risk than the total-market portfolio. However, that doesn't mean that an alternative distribution of stocks cannot be better, because of a favorable trade-off of risk and return.

For example, it is consistent with the three-factor model that a portfolio of 90% stocks overweighting small-cap and value, and 10% bonds, has a higher expected return than the total-market portfolio with the same risk. (The opposite conclusion is also consistent with the model.)

That said, the idea of equally weighting industries doesn't make that much sense, because "industry" is itself a flexible term; fifty years ago, technology and telecommuncations would not have been two separate industries, and manufacturing would have probably been subdivided. And equally weighting stocks tends to be a relatively inefficient way to overweight the smaller stocks in the index, as it requires more turnover than just overweighting all mid-caps.
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nisiprius
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Re: Russell 1000 Equal Weight Index

Post by nisiprius »

But even if you have reservations about cap-weighting, even if you feel there are valid reasons to depart from it, that does not mean that equal weight makes sense. Or that the Russell 1000 so-called "Equal Weight" Index makes sense.

Premise) There are better weightings than cap-weighting.
Premise) Equal weighting is not cap-weighting.
Conclusion) Ergo, equal weighting is better than cap-weighting

is not valid. Nor does "equal weighting is not cap-weighting" prove that equal weighting is the best, or even a good way to depart from cap-weighting.

(Which reminds me. I haven't heard a lot about smart beta lately. Whatever happened to smart beta? Or its friend, "fundamental indexing?")
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Gaston
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Re: Russell 1000 Equal Weight Index

Post by Gaston »

nisiprius wrote: Sat Aug 06, 2022 4:18 pm (Which reminds me. I haven't heard a lot about smart beta lately. Whatever happened to smart beta? Or its friend, "fundamental indexing?")
According to the host and guest in episode 5 of the Bogleheads On Investing podcast, we now call it factor investing.
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burritoLover
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Re: Russell 1000 Equal Weight Index

Post by burritoLover »

Invesco EQAL appears to use this index but the sector allocations don't look very equal-weighted. If it had been a long time since rebalancing, I also wouldn't expect energy to be underweight and IT to be overweight.

Code: Select all

as of 6/30/22:
Information Technology 13.65
Health Care            10.37
Industrials            9.88
Financials             9.27
Real Estate            9.16
Materials              9.03
Consumer Staples       8.99
Utilities              8.52
Communication Services 7.32
Energy                 7.28
Consumer Discretionary 6.54
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