In the last two and a half years, the equal-weight S&P 500 index performance has mirrored that of the Russell 2000 index. Due to excessive concentration, the S&P 500 index has become the new small-cap index.
The chart below shows how the performance of the equal-weight S&P 500 ETF (RSP) has tracked that of the Russell 2000 ETF (IWM) since 2023.
Since January 2023, the IWM ETF has been up 19.9%, while the RSP ETF has gained 20.1%. This is a new dynamic. Since 2014, for example, the RSP ETF has risen 177% versus 104% for the IWM ETF.
The extreme concentration of market capitalization is the primary reason that the equal-weight S&P 500 index has behaved as a small-caps index.
As of May 24, 2024, the distribution has a median of $34,845 million and a kurtosis of 68.6! The six stocks shown on the chart above are the outliers that cause extreme kurtosis. Therefore, it is not a surprise that the equal-weight index has behaved like a small-caps index.
What should be done, if anything? I am old enough to remember the breakup of AT&T in 1984. Nothing of this sort has occurred in the last two decades. Extreme concentration increases tail risks due to the high kurtosis. But more importantly, extreme concentration is not compatible with a sound capitalist model.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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