The S&P Equal Weight Index Uses, Properties and Historical Simulations

The capitalization-weighted S&P 500 is clearly a measure of the investment opportunity set of large-cap U.S. equity market. However, an equally weighted investment strategy might require that its performance be measured against an equally weighted index. The S&P Equal Weight Index (S&P EWI) will provide an opportunity to: • invest in the performance of these 500 leading companies in equal measure; and • make size, style, and sector bets relative to the S&P 500. Standard & Poor's has created the S&P EWI in response to the market's need for an official equally weighted index with the same constituents as the S&P 500. • Index calculation is done according to the divisor-based methodology of the S&P 500. • The quarterly rebalancing process balances representation and investability, while providing additional benefits, such as coinciding with S&P 500 quarterly share adjustments. • Quarterly rebalancing also coincides with derivative contract cycles and results in the index giving an arithmetic average return of S&P 500 stocks between two rebalancing periods. This will facilitate the creation of derivatives and structured products around the index. The S&P EWI has different properties from the S&P 500. • It has a lower concentration of individual stocks than the S&P 500 does. • It has different sector exposures and a slower rate of change in sector weightings. • Annualized market capitalization turnover was 29%, versus 5% in the S&P 500, from January 1990 to October 2002. These different characteristics result in different risk-return profiles for the equally weighted index. We simulated performance of the S&P EWI relative to the S&P 500 during the past 13 years and found no conclusive evidence regarding the outperformance of one index over the other. However, it showed that comparative returns and volatilities of the two indices might differ during market cycles. This provides an opportunity to design spread or hedging strategies. An attribution and correlation analysis showed that the S&P EWI has a higher exposure to the value premium than S&P 500. It is also intriguing that even within a large-cap universe such as the S&P 500, the S&P EWI had a positive loading on the size premium. In other words, changing the weighting scheme of the large-cap index gave it a minor small-stock bias