You probably don’t follow the S&P 500 equal-weighted index. It may seem unimportant if you don’t invest in it. In October, however, it carried valuable information.
Remember how small stocks used to be a source of excess returns? In both the US and Norway, that tide turned in 2015. I’ve made several comparisons of broader and narrower indices to prove my point, but I guess I could have used the equal-weighted index instead. Rebased to match the S&P 500 in January 1990, it would have grown to more than 1.5 times the standard index by 2015. From then on, large-cap dominance – a.k.a. a concentrated index – would have reduced this ratio to a 20-year low of just below 1.08 one week into October.
Then, however, something changed.
In fact, whereas the S&P 500 lost 0.9% in October, the equal-weighted index rose by as much as 5.0%.
Here’s another way of looking at it: Last month, I pointed out that a minority of stocks had managed to keep up with the S&P 500. This month, as much as 72% of those 500 companies posted a positive return – despite the negative index return.
The equal-weighted index last beat its cap-weighted cousin in 2022, which was a year of depressing returns. Apparently, the larger stocks don’t carry higher downside risk. I may add that while the equal-weighted index has slightly higher volatility, the difference tends to disappear when we look at downside deviations only. In other words, concentration carries its own risk.
In the Norwegian market, no such change was visible in October, as war and higher energy prices lifted an ever more concentrated index to new heights. Fewer than half of the companies gained ground, despite an index return of 3.4%.
All of which is yet another reminder that you may be led astray by index figures. Take a look at your own portfolio, see whether your companies are doing well – and, if they are, rest assured that their stock prices are likely to follow.
Finn Øystein Bergh joined Pareto in 2010, the first years in Pareto AS before joining Pareto Asset Management in 2015. He has previous experience as a journalist, chief economist and later managing editor in the financial magazine Kapital. Finn Øystein Bergh holds an MSc in Economics and Business Administration, MBA, cand. polit. (an extended master's degree) in political science and cand.polit. in economics. He writes the financial blog Paretos optimale, and has published several books on economics.
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