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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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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