S&P 500 Equal Weight is the winner..

[hiriskpaul]

.. over 20 years when compared to the S&P 500 index and all but 0.3% of US large cap actively managed funds..

https://www.spglobal.com/spdji/en/resea ... ight-index

.. but not over 10 years when the S&P 500 narrowed the gap.

Some interesting parts in the paper, such as the correlation between the EW index and actively managed funds "on average, the more the S&P 500 Equal Weight Index historically outperformed the S&P 500, the more actively managed funds outperformed the S&P 500."

Invesco launched a LSE listed S&P 500 Equal Weight Index ETF a couple of years ago for those interested

https://etf.invesco.com/gb/financialpro ... nformation

ps the S&P 500 beat all but 4% of US large cap funds over 20 years, so no slouch.

[spasmodicus]

Yes, interesting.
Here in the UK, the FTSE 100 equal weight seems to have performed sometimes better, sometimes worse than the cap weighted FTSE 100, see .pdfs that that you can download here
https://www.ftserussell.com/products/indices/equally-weighted

But comparing the total return from FTSE100 with that of the S&P500 over the last 10 years depressingly shows what a dismal state the UK's industry and commerce are in.

S

[MrFoolish]

But comparing the total return from FTSE100 with that of the S&P500 over the last 10 years depressingly shows what a dismal state the UK's industry and commerce are in.

S

Yes, I do wonder if we are fundamentally bad at business in the UK. I mean, if the entire FTSE100 is valued less than Apple then this is a poor state of affairs! Any views?

[Lootman]

But comparing the total return from FTSE100 with that of the S&P500 over the last 10 years depressingly shows what a dismal state the UK's industry and commerce are in.

Yes, I do wonder if we are fundamentally bad at business in the UK. I mean, if the entire FTSE100 is valued less than Apple then this is a poor state of affairs! Any views?

Another way to look at UK under-performance is to look at UK market cap as a percentage of global market cap. 25 years ago it was about 10% and now it is about 4%. This decline is mostly to do with the high returns on the S&P 500 (averaging 15% annually, plus dividends, since the low of the global financial crisis) and the growth of emerging nations, particularly China.

It is hard to consider all the reasons without getting into political issues like taxes and regulations. But one problem for the UK is that the biggest companies are in just a handful of sectors like natural resources, financials and pharma. If they do not do well then the UK market cannot do well. Conversely tech is a small sector in the UK and it is tech that has driven markets since the 1990s. The S&P 500 is more diversified, even allowing for the higher market caps of Apple, MicroSoft etc.

Another factor is that UK investors demand high dividends. The yield on the FTSE-100 has always been higher than that of America, Japan, China and so on. And if UK companies feel obligated to pay out higher dividends on ordinary levels of earnings, then there is less focus on reinvestment for growth.

[MrFoolish]

I can't disagree with any of that, Lootman. But do you not feel there's also a cultural element - that people in business in the US are much more focussed, driven and frankly ruthless? I've seen UK companies getting bought out and we always seem to accept the offer without playing hardball.

[Lootman]

I can't disagree with any of that, Lootman. But do you not feel there's also a cultural element - that people in business in the US are much more focussed, driven and frankly ruthless? I've seen UK companies getting bought out and we always seem to accept the offer without playing hardball.

Yes, I have worked in America and would say that in general Americans are more driven to succeed. And success is held in higher esteem there whereas here it often feels like there is a suspicion and cynicism about success. Branson and Dyson would be popular heroes if they were American but here we tend to dismiss them - not surprising that they both now live overseas.

British people have always had a reputation for being clever, and inventing things without really making any money out of them.

Whatever the reasons I do not see it changing and deem it a folly to be over-weight in UK shares. In fact you could have a 0% allocation to the UK and do just fine. There is a Vanguard ex-UK developed world index fund.

[MrFoolish]

Whatever the reasons I do not see it changing and deem it a folly to be over-weight in UK shares. In fact you could have a 0% allocation to the UK and do just fine. There is a Vanguard ex-UK developed world index fund.

Or you can buy UK shares, bag the dividends and wait for the Americans to buy them out. Sad but sometimes effective.

[XFool]

It is hard to consider all the reasons without getting into political issues like taxes and regulations.

Another factor is that UK investors demand high dividends. The yield on the FTSE-100 has always been higher than that of America, Japan, China and so on. And if UK companies feel obligated to pay out higher dividends on ordinary levels of earnings, then there is less focus on reinvestment for growth.

Steady on there! You sound as if you are channelling the 1990s Gordon Brown economic policies on UK companies - endogenous growth theory and all.

(Known for ever by some as: "Gordon Brown destroyed my pension")

[Lootman]

It is hard to consider all the reasons without getting into political issues like taxes and regulations.

Another factor is that UK investors demand high dividends. The yield on the FTSE-100 has always been higher than that of America, Japan, China and so on. And if UK companies feel obligated to pay out higher dividends on ordinary levels of earnings, then there is less focus on reinvestment for growth.

Steady on there! You sound as if you are channelling the 1990s Gordon Brown economic policies on UK companies - endogenous growth theory and all.

(Known for ever by some as: "Gordon Brown destroyed my pension")

Political issues are off-topic here. Brown's tax grab on pension funds would have had some effect at the time, of course. But many countries have higher taxes on investing than the UK and their markets do no worse.

And UK shares are attractive to foreign investors in tax terms because the UK applies no tax withholding on dividends, and no CGT applies to non-resident holders of UK shares. Foreigners can invest in UK shares tax free outside of UK stamp duty and whatever taxes their home nation applies, if any.

[vand]

Might just be a cherry-picked start date. A better picture could be given if we track the rolling 20 year outperformance vs cap weighted each month, so we can get an more complete %better vs %worse comparisons.

[hiriskpaul]

Might just be a cherry-picked start date. A better picture could be given if we track the rolling 20 year outperformance vs cap weighted each month, so we can get an more complete %better vs %worse comparisons.

Yes, the start date does matter. The longest running equal weight ETF is RSP. Performance compared to the S&P 500 is on their web site here:

https://www.invesco.com/us/financial-pr ... ticker=RSP

Picking 10 years ago as the starting point would not have been so good, EW index total return rate 11.48%, S&P 500 12.86%. The rate of return of the ETF over the period was 11.18%, illustrating the higher cost of the strategy compared with a straightforward cap weighted ETF.

As this old article explains, going for equal weight is betting on smaller caps and value shares in the S&P 500 outperforming the large caps. Historically that would have been a good bet much of the time, but clearly not all the time: https://www.reuters.com/article/index-s ... 1720080428

On average, randomly picked portfolios of stocks (monkey with a pin portfolios) from the S&P 500 have outperformed the index, but again, not always. This anomaly is the same phenomenon, with the average (mean) stock performance being better than the index due to the small cap and value tilt of those portfolios. Only on average of course, some randomly picked portfolios will be tilted to large caps and/or growth. An EW index is the logical monkey portfolio - just pick all the stocks in the index and you will guarantee a small cap and value tilt.

If the strategy ever became too popular it would of course become self defeating as EW investors bid up the price of the lower cap weighted stocks.

[tjh290633]

If the strategy ever became too popular it would of course become self defeating as EW investors bid up the price of the lower cap weighted stocks.

Only if it became the institutional norm, and there is not enough lower cap stocks to satisfy their voracious appetite.

Much easier for the private investor.

TJH

[spasmodicus]

If the strategy ever became too popular it would of course become self defeating as EW investors bid up the price of the lower cap weighted stocks.

Only if it became the institutional norm, and there is not enough lower cap stocks to satisfy their voracious appetite.

Much easier for the private investor.

TJH

Also, you can spice up your USA portfolio a bit by buying a small cap index. As well as VUSA (S&P 500 tracker), I hold some RTWP which is a Russel 2000 (USA smaller cap) index tracker. It's quite a bit more volatile than VUSA and crashed significantly more in the March 2020 covid downturn, resulting in a significant gain after buying at that point. But that's probably just luck as, on average, it has generally performed slightly worse than VUSA.

S

[Lootman]

Only if it became the institutional norm, and there is not enough lower cap stocks to satisfy their voracious appetite.

Much easier for the private investor.

Also, you can spice up your USA portfolio a bit by buying a small cap index. As well as VUSA (S&P 500 tracker), I hold some RTWP which is a Russel 2000 (USA smaller cap) index tracker. It's quite a bit more volatile than VUSA and crashed significantly more in the March 2020 covid downturn, resulting in a significant gain after buying at that point. But that's probably just luck as, on average, it has generally performed slightly worse than VUSA.

Another idea is to find a tracker of the Extended Market Index. This is the entire US stock market minus the constituents of the S&P 500. So you have both smallcaps and midcaps.

I am not sure there is a UK-listed one but one US-listed example is the Vanguard Extended Market ETF, symbol VXF.

Although you could find a fund that invests in the entire US market as well, like the Vanguard Total Market ETF (VTI), if you do not want to over-weight the smaller shares.

[hiriskpaul]

Only if it became the institutional norm, and there is not enough lower cap stocks to satisfy their voracious appetite.

Much easier for the private investor.

TJH

Also, you can spice up your USA portfolio a bit by buying a small cap index. As well as VUSA (S&P 500 tracker), I hold some RTWP which is a Russel 2000 (USA smaller cap) index tracker. It's quite a bit more volatile than VUSA and crashed significantly more in the March 2020 covid downturn, resulting in a significant gain after buying at that point. But that's probably just luck as, on average, it has generally performed slightly worse than VUSA.

S

Yes, that is another way to add a small cap tilt. Not the same though as you would still be overweight the very large caps and underweight the smaller S&P 500 shares compared to buying an EW index ETF, such as RSP. If the concern is more about over concentration into large US tech stocks, then EW would likely be a better approach. Or do both. The Russell 2000 has significantly underperformed the S&P 500 over the last decade by the way, S&P up 235% to end of June, vs 121% for Russell 2000.

[Lootman]

Also, you can spice up your USA portfolio a bit by buying a small cap index. As well as VUSA (S&P 500 tracker), I hold some RTWP which is a Russel 2000 (USA smaller cap) index tracker. It's quite a bit more volatile than VUSA and crashed significantly more in the March 2020 covid downturn, resulting in a significant gain after buying at that point. But that's probably just luck as, on average, it has generally performed slightly worse than VUSA.

Yes, that is another way to add a small cap tilt. Not the same though as you would still be overweight the very large caps and underweight the smaller S&P 500 shares compared to buying an EW index ETF, such as RSP. If the concern is more about over concentration into large US tech stocks, then EW would likely be a better approach. Or do both. The Russell 2000 has significantly underperformed the S&P 500 over the last decade by the way, S&P up 235% to end of June, vs 121% for Russell 2000.

Note that the Russell 2000 has a surprising number of banks and other financials, which is a big part of its under-performance in recent years.

This is partly because the US has thousands of small regional banks, and they fail quite often. Back when I was working in the US I had an account at a bank that only had one branch. It failed and that had no real effect on account holders because of Federal insurance. But its shareholders would have been wiped out.

[1nvest]

And UK shares are attractive to foreign investors in tax terms because the UK applies no tax withholding on dividends, and no CGT applies to non-resident holders of UK shares. Foreigners can invest in UK shares tax free outside of UK stamp duty and whatever taxes their home nation applies, if any.

So should we generally be holding investment exposure via a offshore account, say in Jersey (or other low/no tax region), a investment account that pays (back into the UK) a dividend = personal dividend tax exempt allowance and taking capital gains = yearly CGT allowance?

Extended further and there are asset allocations that are are generally inclined to broadly lose, that can be negated by opposites that generally gain by a offset (loss negation) amount. So via appropriate portfolio structure in addition to dividend and CGT allowances that might be further bolstered (via gains that are offset by taxable losses where overall no actual loss was incurred).

Surely its not a good practice to encourage UK based poor outcomes, promoting 'invest in the UK in anticipation of a loss that can be offset by gains elsewhere' tax efficiencies.