What Drives the S&P 500 Equal-Weight Premium? Size AND Value
First, a detailed analysis of the S&P 500 equal-weight index against the S&P 500 value-weight index from Jan 1963 through September 2013:
- The equal-weight S&P 500 generates 270bps over the value-weight index.
- HML, the size-adjusted “value factor”, generates a nice CAGR spread of 4.27%. (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_factors.html)
- SML, the value-adjusted “value factor”, generates a nice CAGR spread of 2.54% (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/f-f_factors.html)
What drives the spread?
Many people assume the spread between EW and VW is a size premium, but this doesn’t tell the entire story.
Review the Asset Pricing Model module above (key stats highlighted).
This analysis represents the beta estimates for a variety of asset pricing models, which are used to control for different exposures on a portfolio. Rm-rf is the market-risk free spread; SMB is a L/S spread that captures small-stock exposure; HML is a L/S spread that captures value-stock exposure; and MOM is a L/S spread that captures momentum exposure.
Here is an explanation of how to calculate the various beta/alphas:
The S&P 500 EW index has a fairly large exposure to the “value factor,” which suggests that the spread is driven by size, but also value! There is also a beta of 1.1, suggesting a slightly higher beta.
Below we look at the same analysis, but for the S&P 500 index. There is a beta of 1 (makes sense), a negative size factor (i.e., the value-weight index tilts large), and a roughly flat value exposure.
On net, there is an approximate .32 point increase in the SMB beta and a .31 point increase in the HML beta between EW and VW S&P 500. A casual interpretation of these results is that the premium for the EW S&P 500 index is partially driven by a size premium, but also driven by a value premium.
Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
Definitions of common statistics used in our analysis are available here (towards the bottom)