First Trust just listed two seemingly obscure ETFs based on broad-based Nasdaq indexes.
One ETF is the Nasdaq 100 Equal Weight Fund (QQEW) and the other is the Nasdaq 100 Technology Fund (QTEC). QTEC is also equal weighted.
It seems like a lot of people think equal weighting is better because the Rydex S&P 500 Equal Weight ETF (RSP) has trounced the S&P 500 index over the last few years. I think RSP is better is the wrong way to look at it. RSP has outperformed because it tilts to smaller cap and small cap has done much better than larger cap. Exxon (XOM), GE and Microsoft (MSFT) have been far from market leaders, in terms of performance, but the three make up 8.35% of iShares S&P 500 (IVV). Those same three companies combine to make up 0.60% of RSP. Any wonder RSP has outperformed?
At some point mega caps will rotate back into favor. Eventually everything rotates back into favor even if it seems like it won't.
As long and Microsoft, Intel, Cisco and Dell lag it is a good bet that QQEW and QTEC will outperform QQQQ.
That does not mean QQEW and QTEC are better. They favor different things so it is only logical that they would have periods of leading and lagging the cap-weighted index.
Wikinvest Wire
8 comments:
big caps will not return to favour because long bonds are providing a lower volatility alternative with even higher yield
as a matter of philosophy I am not a fan of absolutes and stock market history clearly refutes this type of absolute statement.
Accepting that an equal weighted index is tilted to small caps, and a cap weighted index is tilted toward large caps, where is the performance cause and effect?
Saying that eventually everything will rotate back begs the question.
An index of stocks beginning with the letters A to M versus an index begining with N to Z will probably rotate against each other in terms of in or out of favor performance.
I suspect that the large caps will continue to underperform in the short to medium term due to the combined risks of outsourcing, undisclosed pension liabilities, increased medical insurance, etc., and other high employee costs. These are far less pronounced in small caps.
Big caps being successful in the long term will depend on more than the passage of time, so rotating back into favor doesn't look like a slam dunk to me.
OG
I forgot to add, that I claim copyright on the A-M and N-Z Indexes. So any ETF produced based on these Indicies will have to pay me a royalty.
OG
OG
In stock market history, small caps typically out perform for about three years coming out of a bear market. That is that they turn up first before large cap. As a bull cycle wears on, outperformance rotates to larger and larger cap until the mega caps lead at the end of bull cycle. This has repeated several in market history.
This has been a weird cycle because of how long small has outperformed large.
Cap-weighted indexes are also implicitly momentum oriented in so far as faster growing companies take up an increasingly % of index weight as time goes on. This is probably more of a sector phenomenon than a matter of whether or not any given company in the index would be considered a value or growth company. I suspect that, along with the cap-size issue (small cap vs. large cap), cap weighted indexes will generally do better when sector leadership rotates slowly and equal weighting indexes will do better when sector leadership changes more rapidly because they must rebalance (adding to trading costs and capital gains distributions of course - TANSTAAFL).
I still say, that this market is reminding me of the market in the 70's. Remember that time when now, everyone is reminding us that "THE MARKET" was at 1000 in 1968 and "at" 1000 in 1982??? They like to throw that out as proof that you can not make money in some very long time frames. What "they" do not tell you is tha small caps, international, oils, materials, and commodities did very, very well during that time. HHHHMMMMMMMM.........
g
George makes a great point. There are plenty of themes that are up huge in the last fill in the time period with huge gains.
I have said this a couple of times in the last few days but most energy stocks and most emerging market stocks are up a lot compared to the S&P which is up a little.
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