What Drives the S&P 500 Equal-Weight Premium? Size AND Value

What Drives the S&P 500 Equal-Weight Premium? Size AND Value

November 14, 2013 Uncategorized
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(Last Updated On: March 9, 2015)

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:

What drives the spread?

betas
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

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:

http://youtu.be/mrfWCUKX1Qw

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.

betasp500
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

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.


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.