New research by FTSE Russell suggests that when the US large cap equity market as reflected by the Russell 1000® Index becomes more concentrated, indexes that equally weight individual stocks tend to outperform cap weighted benchmarks. And a closer look at the US large cap equity market suggests that value-oriented equal weight indexes may have more room to grow.
Tom Goodwin, Senior Research Director, FTSE Russell Indexes, said:
“We compared the annual return of the Russell 1000 Enhanced Value Equal Weight Index over the Russell 1000 Index to the weight of the largest 10 stocks in the Russell 1000 for every year since 2002 and found a .62 positive correlation. In other words, high concentration has often meant better results for equally weighted indexes compared to broad cap weighted benchmarks.
Source: FTSE Russell. Data from January 2002 to December 31, 2016. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
And a closer look at US large cap equity market concentration going into 2017 shows the 10 largest stocks within the Russell 1000 occupying an increasingly large percentage of the index.
Source: FTSE Russell. Data from January 2016 to June 2017. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Harison Sidhu, CFA, FRM, Portfolio Manager, Choate Investment Advisors, said:
"We've seen growing concentration in the US large cap equity market over the past few years. Our research suggests that index-based equal weight strategies, which rebalance by trimming positions that have recently outperformed and adding to names that have recently underperformed, tend to outperform cap-weighted strategies as the market becomes more concentrated. A strategy that refines this equal weight approach by filtering out unprofitable companies, highly overvalued names, and stocks that have underperformed the broader industry is particularly compelling in today's market. In essence, it's eliminating the least desirable companies from the universe."
The Russell 1000 Enhanced Value Equal Weight Index has been designed to reflect the performance of securities in the Russell 1000 universe exhibiting upward relative price momentum and fair valuations. All index constituents are equally weighted and the index is rebalanced twice a year.
The index serves as the basis for the PowerShares Russell 1000 Enhanced Equal Weight Portfolio ETF (USEQ) recently introduced by PowerShares. For more information equal weight indexes from FTSE Russell, go to the FTSE Russell website.
© 2017 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.
All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.
Views expressed by Tom Goodwin of FTSE Russell and Harison Sidhu of Choate Investment Advisors are as of July 26th and subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the LSE Group.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this IDEA should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a licence from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking statements. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. Any forward-looking statements speak only as of the date they are made and no member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking statements.