No. of Recommendations: 0
The return of an equal-weight index like the RSP, over the long-term, is almost certain to be better than the cap-weighted equivalent like the S&P500.
This is an interesting assertion, but I'm not sure it could be true. First off, do we agree that larger companies tend to remain in business more than smaller companies do? If yes, then let's look at a hypothetical index of 500 companies. For simplicity, let's say for a cap-weighted index, that the top 100 in the list get 80% of the money invested and the bottom 400 get 20% of the money invested. And let's say that for the equal-weighted index, all 500 get equal amounts of the money invested. Let's further say that. each year the bottom 5 out of the 500 essentially go to zero (and are replaced with 5 stronger companies). The cap-weighted fund will lose 5 x 0.2 x (1 / 500) each year, while the equal-weighted fund will lose 5 x (1 / 500) each year. Meanwhile, the top 100, on average, ALWAYS do better, and NEVER ever have a complete loss. Therefore the equal-weighted fund will always do worse because it contains MORE of the failed companies, always and by design. Now, if you happen to have a period where the top 100 do worse than the bottom 400, and that has indeed happened before, then for that period the equal weight will obviously do better. BUT, there is never a long term in which the top 100 do worse than the bottom 400. And even if the top 100 do equal to the bottom 400, the equal weight still has that "drag" of owning more of the failed companies.
Am I looking at this wrongly? (I only barely thought it through, and I haven't simulated anything)
