Equal-Weighting S&P 500
app, asset allocation, exchange-traded fund, market, portfolio

The popular market-proxy S&P 500® index is market-cap weighted. This is one of the factors that helps reduce the turnover of ETFs tracking this index. For example, the iShares Core S&P 500 ETF (IVV) has a turnover rate of only 4%. The following chart, produced by the Alpholio™ App for Android, shows the characteristics of a portfolio composed solely of this ETF:

Portfolio 100% iShares Core S&P 500 ETF (IVV)

(Note that Alpholio™ uses a broader ETF as a representation of “the market”; hence, the beta of IVV is different from the conventional one and alpha from zero.)

However, market-cap weighting implies that the largest companies’ stocks have the highest impact on the index. While returns of mega-caps in the index tend to be less volatile, they are usually lower than those of their smaller-cap peers. To overcome this limitation, other ETFs weight equities in the index differently. For example, the Guggenheim S&P 500™ Equal Weight ETF (RSP) assigns each of the 500 stocks a 0.2% weight. This tilts RSP toward smaller-cap equities in the index and results in a 18% turnover. Over the same analysis period, RSP produced markedly higher returns than IVV but at the expense of an elevated volatility and a slightly lower Sharpe ratio:

Portfolio 100% Guggenheim S&P 500® Equal Weight ETF (RSP)

In addition to overweighting of mega-caps, some economic sectors in the index dominate others, as shown in the latest edition of S&P Capital IQ The Outlook:

Sector Weight %
Consumer Discretionary 12.7
Consumer Staples 9.4
Energy 7.8
Financials 16.5
Health Care 15.3
Industrials 10.2
Information Technology 19.9
Materials 3.2
Telecommunication Services 2.2
Utilities 2.9

To counteract this, the ALPS Equal Sector Weight ETF (EQL) applies the same weight to nine sectors (with telecommunication services considered part of information technology). Here are the characteristics of a portfolio consisting solely of this ETF over the identical analysis period:

Portfolio 100% ALPS Equal Sector Weight ETF (EQL)

While the annualized return of EQL was lower than than of IVV or RSP, it was more than adequately offset by a decrease in volatility, which resulted in an improved Sharpe ratio and maximum drawdown.

What if the investor wanted to equal-weight all ten sectors instead of just nine, i.e. keep telecoms separate from IT? To do so, the investor could construct a portfolio of Vanguard sector ETFs, excluding the Vanguard REIT ETF (VNQ). That is because real estate stocks are currently part of the financials sector and not expected to become a separate asset class until mid-2016. Here is how such a portfolio, rebalanced quarterly (just like EQL), performed over the same analysis period:

Portfolio Vanguard Sector (VCR, VDC, VDE, VFH, VHT, VIS, VGT, VAW, VOX, VPU)

The Vanguard sector portfolio had the second highest alpha and Sharpe ratio as well as the second lowest standard deviation (a measure of volatility of returns).

The above analysis period was dictated by the inception date of the EQL, the youngest of all the ETFs used. Arguably, this approximately six-year period may be considered too short and not representative of performance over a full economic cycle. However, it was interesting to see that while equal-weighting the index on a security level produced highest absolute returns, equal-weighting on a sector-level delivered the highest risk-adjusted returns.

To conduct your own analyses of various ETF portfolios, download the Alpholio™ app from

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Analysis of Fidelity Real Estate Investment Portfolio
analysis, mutual fund

A recent fund profile in Barron’s features the Fidelity Real Estate Investment Portfolio (FRESX). This $4.2 billion fund sports a relatively low 0.8% expense ratio and a 28% turnover. According to the article, the fund’s manager

For 18 years, […] has successfully navigated through real estate booms and doldrums, beating two-thirds of his peers over 15 years, and 85% over five.

The primary prospectus benchmark for the fund is the S&P 500 Index. The secondary, and a more relevant, benchmark is the Dow Jones U.S. Select Real Estate Securities Index. While there is currently no ETF available that tracks this index, one of close long-lived approximations is the iShares U.S. Real Estate ETF (IYR). Alpholio™’s calculations show that since July 2000, the fund returned more than the ETF in about 89% of all rolling 36-month periods.

An alternative reference for the fund is the SPDR® Dow Jones® REIT ETF (RWR). Since September 2001, the fund returned more than this ETF in about 52% of all rolling 36-month periods.

Yet another reference for the fund is the Vanguard REIT ETF (VNQ). Since October 2004, the fund outperformed that ETF in less then 26% of all rolling 36-month periods. However, in all three comparisons only total returns but not risk of the fund and ETFs were taken into account.

Let’s take a closer look at the performance of Fidelity Real Estate Investment Portfolio on a risk-adjusted basis. Applying Alpholio™’s patented methodology, a reference portfolio of ETFs is constructed to mimic the fund. In the simplest variant of the methodology, the reference portfolio has both fixed membership and weights. This type of analysis shows that since late 2004, the fund produced around minus 0.15% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund had just four equivalent positions in the iShares Cohen & Steers REIT ETF (ICF; constant weight of 51.2%), SPDR® Dow Jones® REIT ETF (RWR; 24.8%), Vanguard REIT ETF (VNQ; 21.3%), and iShares Transportation Average ETF (IYT; 2.8%).

In a more elaborate variant of the Alpholio™ methodology, the membership of the reference ETF portfolio is fixed but weights can fluctuate over time. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Fidelity Real Estate Investment Portfolio (FRESX)

Since late 2004, the fund’s cumulative RealAlpha™ has been largely flat to negative. The annualized discounted cumulative RealAlpha™ was around minus 0.1%. At about 26%, the fund’s standard deviation was 0.5% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was about 1.13.

The following chart illustrated changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Fidelity Real Estate Investment Portfolio (FRESX)

The fund had only four equivalent positions in the SPDR® Dow Jones® REIT ETF (RWR; average weight of 40.9%), iShares Cohen & Steers REIT ETF (ICF; 35.4%), Vanguard REIT ETF (VNQ; 20.9%), and iShares Transportation Average ETF (IYT; 2.8%).

Over the past ten years, the truly risk-adjusted performance of the Fidelity Real Estate Investment Portfolio was unexceptional. Although the fund’s expense ratio is low compared to an average of its category, active management did not add any value. The fund could have easily been substituted by a combination of just a few major real-estate ETFs. It is also symptomatic of a defunct methodology that the article emphasizes comparisons of the fund’s performance to that of its peers (who collectively underperform benchmarks) rather than to ETF alternatives.

To learn more about the Fidelity Real Estate Investment Portfolio and other mutual funds, please register on our website.


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