Accessing Core Market Exposure: Market-Cap vs. Equal vs. Fundamental Weighting Live Webinar January 20, 2011 2-3 p.m. EDT
Accessing Core Market Exposure Matt Hougan Global Head of Editorial President, ETF Analytics IndexUniverse Why even consider alternatives? What are the risks? Has the actual performance been good? Alternatives in special situations.
Our Panelists Anthony Davidow Managing Director, Portfolio Strategist Rydex SGI Christian Wagner Chief Executive Officer & CIO Longview Capital Management
Traditional Index Funds Percentage of Equity Mutual Funds Indexed Low cost Tax efficient Source: ICI Factbook. Lower risk
S&P 500 Index Why Consider Alternative Indexes? Dot-com Bust S&P 500 Equal Weight Index Launch Research Affl. Launches Fundamentally Weighted ETFs WisdomTree Launches 20 Dividend Weighted ETFs Sources: Bloomberg, S&P, Rydex, PowerShares, WisdomTree
Why Consider Alternative Indexes? Weight Matters!
Market-Cap Weighting vs. Alternative Strategies Vs. Irresistible Force Immovable Object 7
Market-Cap Index Flavors Pure Free-float adjustment Limit individual security weight Limit sector weight
Equal Weight Index Flavors Conventional EW ( CEW ) Sector Equal Weight
Fundamental Index Flavors Factors: Dividends Revenue Earnings Cash Flow Book Value Selection Weighting Time frame
SELECTION WEIGHTING Market Cap Weight Market Cap Market Cap Conventional Equal Weight Fundamental (a.k.a. Economic) Weight Market Cap Fundamentals (e.g., sales, book value, dividends, earnings, cash flow) Equal Value of each security Fundamentals (e.g., sales, book value, dividends, earnings, cash flow)
Efficiency Comparisons Actively Managed Alternative Indexes Market Cap Weighted Index Turnover Expense Ratios Cap. Gains Risk 50% - 100+% 0.30% ->2% High 15% - 30+% <3% - 15% 0.23% - 0.88% 0.07% - 0.28% Low Lowest Source: S&P, Vanguard, Rydex, BlackRock, PowerShares
Composition Differences Sector Tilts Value / Growth Tilts Market Cap Tilts
Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Cap Weight's Sector Tilts 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Russell 1000 CapWeight Utilities Technolgy Durables Materials HealthCare Financial Services Energy Consumer Staples Consumer Discretionary Sources: Russell Investments
Equal Weight Sector Tilts S&P 500 SPY S&P 500 EW RSP R1000 Sector EW EWRI Information Technology 19.0% 15.6% 11.1% Financials 16.0% 16.1% 11.1% Energy 11.9% 8.2% 11.1% Industrials 11.0% 11.6% 11.1% Health Care 11.0% 10.1% 11.1% Consumer Discretionary 10.6% 15.5% 11.1% Consumer Staples 10.4% 8.0% 11.1% Materials 3.8% 6.2% 11.1% Telecomm. Services 3.0% 1.8% 11.1% Utilities 3.0% 6.6% 11.1% Sources: SSgA, Russell Investments and Rydex May not sum due to rounding.
Fundamental Sector Tilts S&P 500 SPY Earnings EPS Dividend DLN Revenue RWL Composite PRF Information Tech. 19.0% 19.1% 9.8% 9.3% 10.5% Financials 16.0% 15.6% 9.2% 15.1% 21.1% Energy 11.9% 11.9% 11.5% 12.9% 12.5% Industrials 11.0% 9.5% 11.5% 11.1% 12.0% Health Care 11.0% 11.2% 12.9% 12.2% 8.8% Cons. Discretionary 10.6% 10.0% 7.6% 13.0% 11.6% Consumer Staples 10.4% 11.4% 18.0% 15.4% 9.1% Materials 3.8% 3.1% 3.3% 3.6% 3.9% Telecomm. Services 3.0% 3.2% 8.5% 3.3% 4.8% Utilities 3.0% 3.4% 6.1% 3.6% 5.2% Sources: SSgA, WisdomTree, RevenueShares and PowerShares May not sum due to rounding.
Value Tilts Market Cap Dividend Earnings Revenue Fund. Equal SPY DLN EPS RWL PRF RSP P/PE 13.6 12.9 12.6 13.3 13.5 14.8 P/B 2.2 2.4 2.2 1.9 1.7 2.1 Div. Yield 2.1 3.2 2.3 2.2 2.4 2.0 Source: Morningstar. P/PE is price to prospective earnings.
Top-Tier Bottom Returns
Performance
Different Methods = Different Results Source: Bloomberg
Different Methods = Different Results Source: Bloomberg
Different Methods = Different Results Source: Bloomberg
Alternative ETF Actual Results 3-Year Results* Total Return Worst Case Volatility S&P 500 - SPY -2.8% -51.5% 30.2% Russell 1000 - IWB -1.0-51.9 29.3 LargeCap Dividend - DLN -9.3-54.0 29.8 Earnings 500 EPS -2.6-50.9 21.6 LargeCap Revenue RWL* 2.4-54.8 30.9 RAFI Fundamental Comp. 1000 - PRF 7.8-55.6 32.9 S&P 500 Equal Weight - RSP 13.0-55.8 33.5 * Results are from 1/14/08 to 1/12/11 except for RWL, which incepted 2/2/2008. Source: Kwanti 23
Fundamental ETF Correlations 3-Year Correlation Dividend DLN Earnings EPS RAFI Comp. PRF S&P 500 Equal RSP S&P 500 Equal Sector Weight EQL IWB Russell 1000 0.98 0.90 0.94 0.97 0.90 IWD Russell 1000 Value 0.98 0.89 0.93 0.94 0.87 * Results are from 1/14/08 to 1/12/11. Source: Kwanti 24
Where To?
Market-Cap Weighting works well when Large cap outperforms Growth outperforms Bubbles form but falter when Small cap outperforms Value outperforms Bubbles burst
Equal Weighting works well when Small cap outperforms Bubbles burst Sectors overweights outperform but falters when Large cap outperforms Bubbles form Sector underweights underperform. Interesting In: Emerging Markets
Fundamental Weighting works well when Small cap outperforms Value outperforms Bubbles burst But falters when Large cap outperforms Growth outperforms Bubbles form
Summary Alternative weighting applications: Replace market-cap beta Tactical shifts Look under the hood!
Our Panelists Anthony Davidow Managing Director, Portfolio Strategist Rydex SGI Christian Wagner Chief Executive Officer & Chief Investment Officer Longview Capital Management
Thank You For more information: IndexUniverse.com Information on Continuing Education credits will be sent by email after a recording of this webinar is posted on IndexUniverse.com.