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“ The data for 2025 and 2026 continues to validate this approach. Recent SPIVA reports show that over a 15-year horizon, nearly 90% of actively managed large-cap funds fail to beat their simple index benchmarks.
Even in the volatile markets of late 2025, active managers struggled; while they promised to protect against downsides, the "fee drag" of high management costs often resulted in lower net returns for their clients compared to a basic Vanguard Total Stock Market index.“ https://m.economictimes.com/news/international/us/...

Yes, it's been hard to beat the mighty (humble) S&P500 the last 15 years. Berkshire hasn't. Equal-weighting was quite poor.

https://stockcharts.com/freecharts/perf.php?SPY,RS...

Man, that RSP return is quite depressing.

The instructions in my will are to liquidate all my positions, including a pretty big slug of Berkshire, and put the equity position in RSP.

My reasoning?

I don't know how Berkshire will unfold, and I won't be here to watch it, so it makes sense to put the money into a broad-based index fund where less watching is required.

The obvious answer is the S&P 500, but I have a general disdain for it, which feels quite contrarian these days, and so the next best option is RSP.

The return won't be the best, but also won't be the worst, which is the middling option I'm looking for.

How about VTI or VT?

VTI has a good story, being "Total Stock Market Index Fund"

Although when you look at the backtest of VTI, RSP, and SPY, there is not much difference. But RSP is slightly the worst of the three.
https://testfol.io/?s=eaYqFuMe1u8

Man, that RSP return is quite depressing.

The instructions in my will are to liquidate all my positions, including a pretty big slug of Berkshire, and put the equity position in RSP.

My reasoning?

I don't know how Berkshire will unfold, and I won't be here to watch it, so it makes sense to put the money into a broad-based index fund where less watching is required.

The obvious answer is the S&P 500, but I have a general disdain for it, which feels quite contrarian these days, and so the next best option is RSP.

The return won't be the best, but also won't be the worst, which is the middling option I'm looking for.



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. And the best time to invest in RSP is when the S&P500 has gotten way ahead of the RSP, like right now. In fact, the very best time is probably when that S&P's outperformance has been so dramatic, and has been going on for such a long time, that people are throwing in the towel and switching back from the losing RSP to the winning S&P, or, perhaps as in your case, just resigning themselves to getting RSP's middling returns forever!

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. And the best time to invest in RSP is when the S&P500 has gotten way ahead of the RSP, like right now. In fact, the very best time is probably when that S&P's outperformance has been so dramatic, and has been going on for such a long time, that people are throwing in the towel and switching back from the losing RSP to the winning S&P, or, perhaps as in your case, just resigning themselves to getting RSP's middling returns forever!

And even if that's wrong and the biggest firms continue (against almost all history) to be the best picks, you still won't do badly. And peak company specific risk is 1/38 as big, so sleepin' is easy.

Personally I'd roll my own index, but that's just me. Top 30% of S&P 500 firms by ROE, equal weight quarterly, still beat the S&P 500 by around 1.2%/year in the 20 years to 2024, even with the roar of the Mags lately. And it lets you skip the occasional thing you wouldn't feel comfortable owning. Top 30% by 5-year sales growth did even a bit better, though it's a bit rougher ride and isn't quite as universal a rule.

Jim

The obvious answer is the S&P 500, but I have a general disdain for it, which feels quite contrarian these days, and so the next best option is RSP.

I assume your disdain is related to the weighting. Because I think the S&P500 and RSP contain the same companies, just in different proportions.

This may be a dumb question...but for those of us without a value line subscription, are ROE data pretty consistent across different providers - and/or is there a site you would recommend in terms of accuracy and ease of data management and implementation?

"is there a site you would recommend"

I like Morningstar because you can build portfolios showing numerous columns including 1-year and 5-year ROE. The problem is that it costs $249/year.

For what it's worth, GTR1 can simulate the S&P with cap weight

{!S5T}

and equal weight

{!S5TE}

Since 1925 the EW version has outperformed by about 100 basis points. Risk Metrics are basically the same.

You can stick in specific start and end dates if you want see how things go under given market conditions.

Baltassar

The Macrotrends site includes ROE on its free screener, under "income ratios." No idea of the quality of the data. If would not be surprised if the "free, and worth it" rule applies.

https://www.macrotrends.net/stocks/stock-screener

Baltassar

Sorry, the previous post is wrong. "Return on Equity" is under "Debt Ratios," along with Price/Book, Price/Cash, Return on Assets, Inventory Turnover, Current Ratio, Quick Ratio, and Debt/Equity.

The "income ratios" includes PE, PEG, PS, Operating Martin, Pre-Tax Margin, and Net Margin.

If the data is good, that's pretty impressive for free, if you ask me.

Baltassar

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.

Why? Serious question.

Academics will tell us it's because RSP gets, a little bit, to the small and value factors. If that's the case, why not target small and value factors?

This may be a dumb question...but for those of us without a value line subscription, are ROE data pretty consistent across different providers - and/or is there a site you would recommend in terms of accuracy and ease of data management and implementation?

In my experience they are all over the place. I can get Value Line through my library, but I don't get the same picks as Jim, so I think even between Value Line products the data is different.

Academics will tell us it's because RSP gets, a little bit, to the small and value factors. If that's the case, why not target small and value factors?

Since RSP's inception, its performance has been basically indistinguishable from the S&P Midcap 400 (IJH). Most of the time the Midcaps seem to have done a little better. Value doesn't seem to come into it. IJH (Midcap Blend) is also basically indistinguishable from Midcap Value (IJJ).


https://stockcharts.com/freecharts/perf.php?RSP,IJ...


Baltassar

This may be a dumb question...but for those of us without a value line subscription, are ROE data pretty consistent across different providers

Looks to me that each provider calculates ROE somewhat differently.
Probably doesn't matter as long as the rankings are consistant within each provider.

is there a site you would recommend in terms of accuracy and ease of data management and implementation

barchart.com You have to sign up for a free account, then you can make a custom view to include ROE%. Download is limited to 1000 stocks.

All the others I have looked at for free just gives you one stock at a time.

Man, that RSP return is quite depressing.

Put GOOG or TSLA on the chart and BRK / SPY are absolutely traumatizing in the same timeframe.

Jim,

Is there a trading platform that would make doing something like this easier and possibly automated?

Is there a trading platform that would make doing something like this easier and possibly automated?

Well, you'd have to figure out the picks. But once you've done that, sure.

For example, Interactive Brokers has a feature that you can upload a spreadsheet (actually CSV I think) with tickers and it will redo your portfolio to be what's in the list in more or less one step. I think it's used a lot by managed account folk to set client accounts to match model portfolios. Perhaps more common, you can apparently also export the current portfolio allocations, adjust them, then re-import them to get it balanced to the weights you want.

I imagine some other brokers have similar features.

For doing the picks, I've generally used an ancient Excel macro done by someone on the Mechanical Investing board, now sadly passed away. You can import a stock price/fundamentals database from Value Line or Stock Investor Pro (or elsewhere, if you have it in tab delimited format), then stock screens are programmed in a mostly intelligible way as blocks in a different spreadsheet. But if the criteria you want to use are simple enough you can do it "manually" by just pulling, say, stock price + ticker + ROE from some database into an Excel sheet. I've done that a lot too. It depends how complicated your stock selection criteria are.

One tip: do NOT use an up to date list of S&P 500 constituents as your "universe" of eligible stocks. The easiest free money in the world is using the list from 6-12 months earlier, which means you include things that have been ejected and skip those that are new entrants. If you duplicate the whole index with its own weights (but a stale list) you'll outperform the official index by quite a bit.
https://www.researchaffiliates.com/publications/ar...
"We find that, for the period from October 1989 through December 2017, additions outperformed the market, on average, by 523 bps over the period between announcement date and effective date. In contrast, we find that discretionary deletions (those not related to corporate actions such as a merger or acquisition) underperformed the market by an average of 429 bps over the grace period... From October 1989 through December 2017, the S&P 500 (not the index funds) would have performed 22 bps better a year if additions and deletions were effective immediately at the close preceding the announcement."

Jim

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.
Why? Serious question.
Academics will tell us it's because RSP gets, a little bit, to the small and value factors. If that's the case, why not target small and value factors?

No, it's not the small/value factor tilt. Not based on my research.

There is a small amount that is a result of pumping a bit (very small bit) of money out of statistical noise in prices: some prices bump up a bit in one period while others go down a bit. The next rebalance will sell tiny bits of the first group and buy tiny bits of the second group. In the next period, like as not, the same random noise will be in the reverse direction. This creates a bit of value, but it is small. it's fairly easy to manage by simulating rebalancing at faster and faster intervals, and see where it tops out. You might get 0.2% that way if you type really quickly and don't pay commissions.

Rather, the main source of value is from not holding large amounts of things that are currently overvalued, a disadvantage of any cap-weight index (whole market, sector, whatever).

Consider: Let's assume that every company has some true intrinsic value. Its value is unknowable by mere humans, but it exists: the present value of all future coupons it can eventually pay out, till the end of the universe (or bankruptcy), counting any final payout at shutdown or acquisition. Since this number is unknown, at any given time we assume that some stocks are trading above their true intrinsic value, and some are trading below true intrinsic value. If they were all trading at true fair value, then cap weight order would be the same as "total aggregate company value" order. But because some are a bit overvalued and some a bit undervalued on any given day, that order gets slightly shuffled. Each company is going to be at least a few notches higher or lower in the sort order than it "should" be based on: the ranks will have error bars. With me so far?

There are two things that are important that come out of this.

First, it means that on any given day, you have more of your money allocated to the overvalued firms, and less of your money allocated to the undervalued firms. This is not optimal. In the simplest sense, this is the reason cap weight is so bad.

Second, the order shuffling does weird things at the very top. Overvalued stocks near the very top shuffle to the top, and there aren't any higher valued firms to shuffle downwards into the ranks to balance that out. Consequently it is inevitable that, on average, the very largest firms are very much more than "randomly" likely to be overvalued ones...and those are the ones to which a cap-weight strategy allocates the most money.

It's certainly true that the very largest firms have been outstanding performers lately, but one has to realize that for the prior few centuries this was very much NOT the case on average...for the reasons above. (and also because times change...the very most successful firms were once railroads, but that's not true any more). For example, the biggest 5 stocks underperformed the S&P 500 by a bout 4.25% per year in the 30 year 1986-2015 inclusive. Then the Magnificent group bull run started: the biggest 5 led the index by 9%/year in the next 9 years. My hunch is that this won't be the case forever. (This is actually the same as the first effect, but because the position sizes are so large it becomes really important).

An excellent article to track down is "The Surprising Alpha From Malkiel's Monkey and Upside-Down Strategies". It's a test of all the "smart alpha" strategies which weight stocks within broad portfolios in ways other than by market cap. They also tested the *reverse* of every strategy: e.g., heavily weighting the very worst firms ranked by ROE, not just the test of overweighting the very best. The prosaic but strong result was that virtually every "smart alpha" strategy beat the S&P 500. The more startling result: so did virtually every reversed strategy. The main conclusion was that capitalization weighting is a singular outlier...to the down side. Any other weighting (at least from the long list that they used, or their inverses) worked better. Equal weight is one of the simplest non-cap strategies, and minimizes company specific risk.

You can find that paper on line by searching the title. The main page about it at Research Affiliates has a broken link, but it's out there.

The authors of that white paper attributed the outperformance to the "factor" stuff, but I think that's nonsense based on my own analysis, and the fact that most of the "factor" outperformance research has been debunked, being mostly liquidity related. In the end, it doesn't matter all that much WHY it works. Just avoid cap weight in all your investing. (and never use an "at market" order!)

Equal weight beat cap weight "only" about 70% of rolling-five-year periods since 1916 on the S&P 500 and its cap weight predecessors, and the average amount across all those five year periods was quite large.

Jim

Jim,

Does that excellent analysis still hold true if we have a capricious dictator picking winners and losers?

Is there a trading platform that would make doing something like this easier and possibly automated?

M1.com can do this.
You just add/remove the stocks from the "pie" that the "portfolio" uses, then select all and click "equal weight" in the "pie". It doesn't take a list, though, you have to manually remove & add.

Ignore their weird terminology. ;-)
The next trading session they effectuate all the trades in all the portfolios that use that pie. By default it will not sell any existing stocks that are over-weight.

============================================
One tip: do NOT use an up to date list of S&P 500 constituents as your "universe" of eligible stocks. The easiest free money in the world is using the list from 6-12 months earlier, which means you include things that have been ejected and skip those that are new entrants. If you duplicate the whole index with its own weights (but a stale list) you'll outperform the official index by quite a bit.

But using our screens instead of "duplicate the whole index", how many of those added & removed stocks would even pass our filters? Generally we are only picking 5-10-20 stocks.

Does that excellent analysis still hold true if we have a capricious dictator picking winners and losers?

Yes. Unless that process strongly favours the very largest firms systematically.

If some giants are in the doghouse but others are in the Big Man's good graces, it would still be true. To the extent that market prices deviate even further from true aggregate value than they already di, perhaps more so, though the reversion to value might perhaps take even longer. Depends on the longevity of the regime, I imagine.

Hypothetically speaking, of course.

Jim

Jim,

An excellent article to track down is "The Surprising Alpha From Malkiel's Monkey and Upside-Down Strategies". It's a test of all the "smart alpha" strategies which weight stocks within broad portfolios in ways other than by market cap. They also tested the *reverse* of every strategy: e.g., heavily weighting the very worst firms ranked by ROE, not just the test of overweighting the very best. The prosaic but strong result was that virtually every "smart alpha" strategy beat the S&P 500. The more startling result: so did virtually every reversed strategy. The main conclusion was that capitalization weighting is a singular outlier...to the down side. Any other weighting (at least from the long list that they used, or their inverses) worked better. Equal weight is one of the simplest non-cap strategies, and minimizes company specific risk.

You can find that paper on line by searching the title. The main page about it at Research Affiliates has a broken link, but it's out there.

I have it. Results from the paper:
Global developed markets 1,000 stock portfolio 1991-2012:
Cap weight 7.15%
Equal weight 8.36%
Book Value weighted 9.5%
Fundamental weighted 11.00%
5-year Earnings weighted 11.2%

I buy your explanation of why cap weighting is sub-optimal. Joel Greenblatt has written on the subject also:
"In effect, if emotions really do drive certain stocks to be overpriced, a market cap weighting guarantees that we will own an inferior portfolio. We don't even have to identify which stocks are overpriced and which are underpriced. As long as we know that at least some stocks are mispriced relative to their fair value, weighting by market cap will ensure that we buy too much of the overpriced ones and too little of the bargains".
(Greenblatt (2011), The Big Secret for the Small Investor, page 99).

In that book Greenblatt goes on to discuss various weighting schemes, result:
Cap weight < equal weight < fundamental weight (e.g. RAFI) < Greenblatt's "Value weight" (low price/high ROC)

The authors of that white paper attributed the outperformance to the "factor" stuff, but I think that's nonsense based on my own analysis, and the fact that most of the "factor" outperformance research has been debunked, being mostly liquidity related. In the end, it doesn't matter all that much WHY it works. Just avoid cap weight in all your investing. (and never use an "at market" order!)

I'm confused about "factor" vs "quant" (or mechanical) investing. Isn't factor investing an application of quant methods? For example, you find companies with high ROE have tended to outperform on average, which makes sense, then select a portfolio of stocks using that "factor". Isn't this what the factor investing industry is doing?

In that book Greenblatt goes on to discuss various weighting schemes, result:
Cap weight < equal weight < fundamental weight (e.g. RAFI) < Greenblatt's "Value weight" (low price/high ROC)

That is what he espoused in a couple of his books. Nobody has been able to find performance in the data anything like what he claimed as is valuation formula, but that's life. Fundamental weight is superior to cap weight in that it doesn't allow overallocation based on overvaluation, but I personally don't see the reason to invest more of my money in bigger companies. Yes, the market as a whole must do so by construction, but I don't.


I'm confused about "factor" vs "quant" (or mechanical) investing. Isn't factor investing an application of quant methods? For example, you find companies with high ROE have tended to outperform on average, which makes sense, then select a portfolio of stocks using that "factor". Isn't this what the factor investing industry is doing?

The terms mean pretty much the same thing. The term "factor" normally has the connotation of studies done long ago that purportedly showed that there were only very few factors that explained most variation in stock returns: small stocks doing better than big ones, value stocks doing better than growth, momentum having some merit, etc. I think there were four in the original papers. Quant investing is simply investing based on anything you could write a program for: fundamental quantities and/or price/volume figures. But in the most general sense, anything a quant strategy uses is a factor. The confusion comes about because some traditionalists assert that quant strategy XXX is working only because it has a bit of one of the old four factors. (earth, air, fire, water?) It's worth noting that the "small beats big" factor was never really a thing, according to some newer research, it was mostly about liquidity. Personally, my two favourite dumb quant criteria (factors?) are ROE and sales growth rate. One quant criterion that has worked very well in recent years is upgrades to forward earnings estimates.

Jim

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)

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?

In a word, no : )

First, it's probably better to look at average returns, including blowups, rather than just blowups.

Yes, extreme microcaps can be pretty fragile, and indeed hard to examine as the notion of "current price" starts to become Heisenbergian.

But outside of those, average performance is mostly independent of company size. (There used to be a consensus that small caps did better, but as mentioned that may have been a misreading of the data). The biggest effect is that the very largest very few are, other than during certain gigacap bull markets, remarkably poor performers through the decades.

This might seem counterintuitive, but it arises mainly from the observation that (a) there is a price for everything, and (b) there is no such thing as a persistent free lunch. Weak small firms have low stock prices and low market caps, just low enough that on average there isn't a persistent underperformance, nor outperformance, n average through the years. If they did worse on average over time, people would catch on and the prices would be even lower. And vice versa.

Jim

First off, do we agree that larger companies tend to remain in business more than smaller companies do?

...

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.


The top companies can wipe out, too. In Canada, we had Nortel at #1, in fact worth more than the next few combined, just a year or two before it went bankrupt. Nokia did something similar (without quite going bankrupt) a few years later, in Finland.

What about the USA? Surely not so vulnerable?

You might have a look at this site: https://www.finhacker.cz/en/top-20-sp-500-companie... . It lists the top 20 companies in the S&P 500, by market cap, from 1989 to today.

It starts in 1989 with Exxon, IBM, GE, Bristol-Myers-Squibb, and Merck in the top 5 spots. Honourable mention to Verizon, AT&T, 3M, AIG, Boeing and Pfizer, who were in the top 20. With the exception of AIG, none of them are bankrupt, but they have not provided good returns, and with the exception of Walmart, not a single top-10 company is still in the top 10, 35 years later.

Skip ahead to 1995, and drug companies were all the rage, with Merck #4, Johnson and Johnson #6, BMS and Pfizer #12 and 13, and Eli Lilly #18. That last one would have worked out very well, thank you obesity drugs, but all the others have done poorly. As have Coca-Cola (#2!), Procter and Gamble (#5), IBM (#9) and Intel (#10), not to mention AIG and Fannie Mae (#14 and #16), whose shareholders were wiped out 13 years later.

End of 1999 of course tech was the thing, and Microsoft was far ahead of all the others. That investment has worked out well, but of course Intel (#6), IBM (#8), AIG (#14), Qualcomm (#16), AT&T (#19) and Verizon (#20) have been terrible investments since then.

Of today's stars, most will not go bankrupt either, but you are making an awfully big bet on those top 20, which are worth about the same amount as the other 480 companies in the S&P 500 combined. They may seem untouchable today, flying high on recent successes, but whoever is looking at that table in 10 years may wonder what all the fuss was about with Nvidia (#1), Broadcom (#7), Tesla (#8) or Palantir (#19). Of course, my hunch is that Tesla will be #1, but my hunch could well be wrong, and it might also be #50, who knows? Buying these stars of 2025 probably means we are buying huge stakes in the things that are most popular today, but which may well fall back when the wisdom of paying 40, 60, 100 or 200 times earnings for these growth stars starts to look dumb, or when something new comes along that makes the internet and AI look stale.

Regards, DTB

It starts in 1989 with Exxon, IBM, GE, Bristol-Myers-Squibb, and Merck in the top 5 spots. Honourable mention to Verizon, AT&T, 3M, AIG, Boeing and Pfizer, who were in the top 20. With the exception of AIG, none of them are bankrupt, but they have not provided good returns, and with the exception of Walmart, not a single top-10 company is still in the top 10, 35 years later.

But isn't this a factor IN FAVOR of cap weighting as opposed to equal weighting? If you cap weight, as the companies go out of favor, and as their market cap drops, the percentage they comprise of the index also drops. Meanwhile, when they are equal weight, the percentage they comprise in the index remains the same until the bitter end (when they fade to nothingness). Let's say a company is worth $5T and is 7.12% of the S&P500 index. And let's say that company has issues and next year is only $3.5T, then it'll go down to about 3% of the index. And let's say the company continues to have problems and drops in value to $1T? Then it'll drop to only 1.5% of the index. Meanwhile if it were equal weight, it would be 0.2% of the index at $5T, and 0.2% of the index at $3.5T, and 0.2% of the index at $1T. And if it heads to failure and nears the zero value, it'll still be 0.2% of the equal weight index as it becomes a zero (or gets removed from the index altogether).

with the exception of Walmart, not a single top-10 company is still in the top 10, 35 years later.
...
But isn't this a factor IN FAVOR of cap weighting as opposed to equal weighting? If you cap weight, as the companies go out of favor, and as their market cap drops, the percentage they comprise of the index also drops.

But the value of your shareholding drops with it, while you are holding a really big allocation to it, making you poorer. So no, it's not an argument in favour of cap weight.

Rather than thinking about the trajectory of individual firms over time, think about the average return of your portfolio in an average year. That is a weighted function of the average return among companies in your portfolio. On average, a random company in a random year goes up in value a good amount. (more than the S&P 500 does, as a side note). The amount of return this makes you on average is almost completely unrelated to the size of the firm, so there is no good reason to prefer big over small or vice versa.

The one well known exception, and a very strong result, is the few at the very top in size that have a preponderance of overvalued firms, for very simple arithmetic reasons: any big company that gets hugely overvalued will
necessarily be found there. Their long run average returns are TERRIBLE. This may or may not be a good reason to skip them entirely, but it seems clear to me that it is plainly a sufficient reason not to want to overweight them. Do they do well for a few years sometimes? Sure, as does anything else. Is this a cycle, or a law of nature? It's a cycle.

Now, if you know one or more of those specific firms and have well reasoned conclusion that one or more of them will do particularly well, go ahead and overweight those. Or, if you believe that the fundamental economics of stock markets have permanently changed, and that competition and cycles of valuation don't really matter any more (for which a case could be made), then you my wish to invest in them. But neither of those is a discussion that has relevance to an index investor who wishes to get a decent return with minimum risk and minimum knowledge.

Jim

But isn't this a factor IN FAVOR of cap weighting as opposed to equal weighting? If you cap weight, as the companies go out of favor, and as their market cap drops, the percentage they comprise of the index also drops. Meanwhile, when they are equal weight, the percentage they comprise in the index remains the same until the bitter end (when they fade to nothingness). Let's say a company is worth $5T and is 7.12% of the S&P500 index. And let's say that company has issues and next year is only $3.5T, then it'll go down to about 3% of the index. And let's say the company continues to have problems and drops in value to $1T? Then it'll drop to only 1.5% of the index. Meanwhile if it were equal weight, it would be 0.2% of the index at $5T, and 0.2% of the index at $3.5T, and 0.2% of the index at $1T. And if it heads to failure and nears the zero value, it'll still be 0.2% of the equal weight index as it becomes a zero (or gets removed from the index altogether).


I agree with Jim's response, but here's another way of looking at it.

Some companies will go up, and others will go down, and both the market-cap weighted SPY and the equal weight RSP will have the same numbers of winners and losers. But the thing about the SPY is that the top firms are very heavily weighted - right now, the top 20 firms are worth about as much as the other 480 firms combined. So the whole question becomes, do those top 20 firms tend to have good returns, or not? If the answer is no, as much research indicates, then you don't want to be overweight those top 20 firms. This only seems counterintuitive because the top 20 firms have done so spectacularly well, in the last few years, which obviously is why they are the top 20! But looking at the top 20 from, say, 30, 25, 20, 15, 10 and 5 years ago, to see if they were good investments, provides some perspective.

The fact that firms like GE, AIG, Fannie Mae, Merck, Pfizer, Procter and Gamble, Johnson and Johnson, Cisco, Intel, etc. were for a short period of time heavily in favour, and have done terribly since then, means a SPY strategy would have had you heavily overweight in all these poorly performing stocks. The most you could lose with RSP when a firm goes bankrupt is 0.2%, but you actually lose a lot more if your Chevron goes from 1.6% in 2010 to 0.95% in 2015, for instance, just because oil stocks were doing really well in 2010.

To be fair, if you look at what you would have owned in, say, 2015, and how that has done since then, you would have done quite well being overweight the giants (Apple, Alphabet, Microsoft, Berkshire, Exxon, Amazon, Meta, etc.), as it turns out that most of those companies have done very well, changing their acronyms over the years (FANG, FAANG, MAMAA, Mag 7), staying near the top. And obviously that is why the SPY has outperformed the RSP recently. But if you go a bit farther back, it is easy to see why the stocks at the top of the list include a lot that are only temporarily in favour, and lose big percentages when they fall out of favour.

dtb

Or maybe VO ?

Not equal weight, but a more even spread than a S&P500 tracker. Also appears to be at a cheaper valuation just now.

SA

The fact that firms like GE, AIG, Fannie Mae, Merck, Pfizer, Procter and Gamble, Johnson and Johnson, Cisco, Intel, etc. were for a short period of time heavily in favour, and have done terribly since then, means a SPY strategy would have had you heavily overweight in all these poorly performing stocks.

Aye, but the SPY strategy also had you in Alphabet, Amazon, Apple, Microsoft, Meta and NVIDIA as they grew, and let them grow - it didn't keep chopping them off every quarter. If you went with a total market fund you also got Tesla before it joined SPY.

It's clear to me that cap weighting isn't optimal. It's not clear to me that equal weighting the S&P500 via RSP is an improvement.

Could it be that RSP is better for the saver, SPY is better for the person living off their money?

But the thing about the SPY is that the top firms are very heavily weighted - right now, the top 20 firms are worth about as much as the other 480 firms combined. So the whole question becomes, do those top 20 firms tend to have good returns, or not? If the answer is no, as much research indicates, then you don't want to be overweight those top 20 firms...

I might add, "even if the answer is no idea, you don't want to overweight those firms".

Why overweight anything without decent evidence it's likely to outperform or less likely to do badly? Company specific risk can strike at random. Possibly more so in this era.

Jim

Cap weighted is the only method that automatically stays at the same weighting, hands off.
It's about the only way to manage a 100's of billions of dollars fund.

Equal weighting requires continual active trading to maintain its balance.

RSP turnover is 24%.
GSEW turnover is 46%.
SPY turnover is 3%.
QQQ turnover is 8%.
QQQE turnover is 34%.

Another thing I didn't really think about: "equal-weighting means selling winners and buying losers each quarter to maintain balance. "

Another thing I didn't really think about: "equal-weighting means selling winners and buying losers each quarter to maintain balance. "

Well, the evidence shows that it's better interpreted (statistically) as "equal-weighting means selling overvalued stuff and buying undervalued stuff each quarter to maintain balance. " Yes, the trimming sometimes starts before the overvaluation level, but reliably skipping big allocations to overvalued stuff is a very big win.

You're right, equal weighting does require more trading than cap weight. But so what? You're still better off. Higher average returns even after fees, vastly lower company specific risk.

Cap weight, it should be noted, was originally invented as a way to track the market's general level, NOT as an investment strategy, which is just as well. Fund management companies really appreciate the lower trading, but I don't see it as a plus for investors.

If you have a credible reason to overweight something, by all means overweight it. But "it's a really big company" doesn't really make the cut as a credible reason : )
You're looking for the most total return per dollar you invest, not the most total return at head office.

Jim

Why overweight anything without decent evidence it's likely to outperform or less likely to do badly?

So, try to weight by expected return?

https://www.avantisinvestors.com/avantis-about-us/...
Expected Returns: Valuation theory shows that the expected return of a stock is a function of its current price, its book equity (assets minus liabilities) and expected future profits... We use information in current market prices and company financials to identify differences in expected returns among securities, seeking to overweight securities with higher expected returns based on this current market information. Actual returns may be different than expected returns, and there is no guarantee that the strategy will be successful.

So, try to weight by expected return?

You could certainly try, but then you'd be trying to enter the competition to figure out which things are worth more versus less than the global consensus. That's a tough task, probably not suited to the same population as those interested in index investing.

The efficient market hypothesis isn't actually true, but it's closer to being true than it is to being false. Beating "the market" over the long run is hard.

For those without the skill to analyze individual firms and project their likely returns better than the average bear, the closest thing to a free lunch that I know of is to skip cap weight funds.

Jim

PS
Though that's a nice quote and link, they're selling investment management services, a crowd that is usually worth taking with a grain of salt : )

So, try to weight by expected return?

That sounds to me about as useful as saying - Buy stocks that are going to go up, and sell stocks that are going to go down.

Elan

Well, the evidence shows that it's better interpreted (statistically) as "equal-weighting means selling overvalued stuff and buying undervalued stuff each quarter to maintain balance. " Yes, the trimming sometimes starts before the overvaluation level, but reliably skipping big allocations to overvalued stuff is a very big win.

Intellectually I know that for most periods of time, equal weight results in somewhat better returns. The only periods when it does not is during big tech runs. But I'm trying to understand it viscerally. I don't see why "big" = "overvalued" and "small" = "not overvalued", of course cap-weighting is choosing bigger over smaller ...

Maybe overvalued. can be determined by P/E? or perhaps a smoothed average P/E? Maybe instead of strictly equal weighting, one could try weighting high P/E stocks a little lower than lower P/E stocks? I wonder what the result would be in that case?

For those without the skill to analyze individual firms and project their likely returns better than the average bear, the closest thing to a free lunch that I know of is to skip cap weight funds.

Historical data makes a compelling case for the equal weight advantage, but cap weight has been trouncing equal weight since RSP and QQQE's inception over 6 years ago.

I try to avoid reading too much into recent performance, but I've seen many strong historical patterns that held consistently true for decades fall apart suddenly and lost whatever advantage they had. Or worse: mean reverted.

And after 6 years time, it's making me wonder if the equal weight advantage over cap weight is another example of this.

Do you have reasons to believe that the advantage is enduring, and that the last 6 years is just a short term (or maybe it's now graduated to "medium term") fluke?

Historical data makes a compelling case for the equal weight advantage, but cap weight has been trouncing equal weight since RSP and QQQE's inception over 6 years ago.

AFAIK RSP has existed for more than 20 years.

Elan

Historical data makes a compelling case for the equal weight advantage, but cap weight has been trouncing equal weight since RSP and QQQE's ... over 6 years ago.

Yes, it has been a good time for giants.

There are two main explanations that spring to mind.

One is that it has been a bull market for them recently, and they're new overvalued relative to their somewhat smaller brethren, which is likely to be followed by mean reversion. Not necessarily that the giants will do badly, but that leadership will be outside the top handfull. The rhyme from history: cap weight had another stretch of great results not that long ago, and it ended. The real total return of the S&P 500 in the 5- and 6-year stretches to the March 2000 peak, dominated by the largest firms, were 22.8%/year and 19.7%/year. The next 5 and 6 years were -3.7%/year and -2.3%/year: what goes up [too much] must come down. Equal weight relative to cap weight in the 5 years before the peak: lagging by -8.6%/year, same mood as now. In the five years after: equal weight advantage 11.0%/year.

Another explanation is that it is different this time, and the very biggest will remain the best investments going forward even from these levels. That "different this time" phrase isn't tongue in cheek, there are real reasons to consider that. Very small listed firms are terrible businesses now unlike the past, since decent ones are simply acquired so there is no pipeline of new winners. Almost every US industry is seeing reduced competition and consequently higher rewards to the biggest. There is no prospect of government fiscal retrenchment, and from the macro identities high corporate profits are the most prominent flip side of government deficits. Regulatory capture is always a problem, but probably an even bigger problem with such size concentration.


Nobody has ever said that equal weight will beat cap weight all the time. But for someone without better information, being the audience for index funds, it's the smart bet. I have cap weight and equal weight real total return data daily back to 1930, and equal weight wins most of the time (after backfilling with the modern era cost drag of trading and fees). As others noted, historically the outperformance is particularly strong on average after a stretch that cap weight has been in the lead for a long while. That may not be the case this time, but it's a bit of a bonus reasoning to add to the long run smart bet.

On an entirely unrelated subject, I note that the ETF HDGE, currently trading at $15.93, has returned -7.6%/year in the last 5 years. This is quite good performance for a short fund in a stretch that SPY has returned +14.5%/year. Somebody with no idea of market direction who put half their money into each of them (direction neutral on starting day) five years ago then took a nap would have made 5.7%/year. (admittedly far from fully hedged in the latter part: 50% net long by now)

Jim

Though that's a nice quote and link, they're selling investment management services, a crowd that is usually worth taking with a grain of salt : )

Sure. Avantis are a fund manager, started by some folks formerly with Dimensional. They are doing quite well.

Avantis Investors Achieves Growth Milestone
In six years, Avantis has passed $100 billion in assets under management
https://www.americancentury.com/newsroom/2025-avan...

"Avantis Investors uses quantitative models as a core part of its investment process, making them a type of "quant-leaning" or systematic active fund. They are not purely algorithmic quant funds in the traditional sense, as human portfolio managers make final decisions, but their approach is highly systematic and data-driven."

Avantis expense ratios are fairly low, 0.15% for large cap value AVLV, for example.
AVLV is doing quite well for a "large cap value" fund - currently matching SPY since inception - which perhaps shows how their definition of "value" isn't the traditional "buy what don't grow". Interesting to me, it don't own Tesla or Berkshire.

https://stockcharts.com/freecharts/perf.php?SPY,BR...

<<So, try to weight by expected return?>>

That sounds to me about as useful as saying - Buy stocks that are going to go up, and sell stocks that are going to go down.

Sure, when you pull it out of context.

You do you. As my old father-in-law used to say: "that's what makes horse racing".

I have cap weight and equal weight real total return data daily back to 1930, and equal weight wins most of the time (after backfilling with the modern era cost drag of trading and fees).

Thanks for your thoughts. Is it possible to use your data to identify how many rolling time periods there have been since 1930 where the years of outperformance of cap weight over equal weight for the S&P500 exceeded our current stretch? I'm curious how rare it has been historically for the period of cap weight outperformance to last as long as this.

Thanks for your thoughts. Is it possible to use your data to identify how many rolling time periods there have been since 1930 where the years of outperformance of cap weight over equal weight for the S&P500 exceeded our current stretch? I'm curious how rare it has been historically for the period of cap weight outperformance to last as long as this.

Sure.
I looked at rolling five year intervals, real total returns, annualized, of both strategies. My tables haven't been updated in a while, so they end last April at the moment. But for a test of over 90 years a few months shouldn't matter much.

Percentiles of the difference, positive numbers meaning equal weight did better.

0.00    -8.98%
0.10    -2.70%
0.20    -1.50%
0.30    -0.31%
0.40     0.73%
0.50     1.54%  median advantage rolling five year interval
0.60     2.42%
0.70     3.82%
0.80     5.23%
0.90     7.87%
1.00    24.98%

Simple average across daily starts of the five year advantage: 2.16%/year
Probability of equal weight having the advantage in a five year stretch: 66.54%

Some of this is probably overly optimistic, as during many of those years it was hard to do equal weight and less hard to do cap weight.


Same percentiles of the gap again, but only the figures since 1960

0.00    -8.98%
0.10    -2.30%
0.20    -0.97%
0.30    -0.12%
0.40     0.70%
0.50     1.41%
0.60     1.99%
0.70     2.96%
0.80     4.61%
0.90     5.74%
1.00    11.09%

Simple average across daily starts of the five year advantage: 1.55%/year
Probability of equal weight having the advantage in a five year stretch: 68.49%


...and lastly, just the figures since RSP was launched in May 2003

0.00    -4.58%
0.10    -2.58%
0.20    -1.73%
0.30    -0.89%
0.40     0.11%
0.50     0.93%
0.60     1.72%
0.70     2.38%
0.80     4.34%
0.90     6.63%
1.00    11.09%

Simple average across daily starts of the five year advantage: 1.38%/year
Probability of equal weight having the advantage in a five year stretch: 60.68%

Please don't ask follow up questions - I just calculated all the five year rolling figures for this post, then threw them away : )

Jim

surprised Longleaf is even mentioned and still around. their performance is so laughable.

surprised Longleaf is even mentioned and still around. their performance is so laughable.

Well, I think I'm the only one who ever does... :-)

I occasionally look at them. I had a substantial investment with them at one time. My excuse - I was busy running a business and having kids, and decided to farm out investment management*. Longleaf seemed to fit the bill - value investors, concentrated portfolio, "eat their own cooking", David Swenson wrote about them in complimentary terms in his book. They really, really screwed up in 2007/2008. They saw what was happening but somehow failed to execute. And never really got any better, all the while charging their 1% or so. I did finally give up on them, 10 years ago.

It's difficult to figure out how they have screwed up so badly, and yet still have $3.7 billion AUM.

Since I got out (11 years): Partners Fund CAGR 4.35%
https://testfol.io/?s=dDQJiLoWoni

*I would have been far, far better farming it out to Jack Bogle.

Reminds me when I totally chased performance of Ken Heebner’s CGM focus Fund ~20 years ago only to watch it accumulate a ton of new money & fall face first 40%-50% within a few months. I saw CGM finally closed it down in 2022. At least painful lessons like these helped me find Buffett & Berkshire shortly thereafter!

At least painful lessons like these helped me find Buffett & Berkshire shortly thereafter!

Same for a lot of us. I think mine was the Third Avenue Value Fund. Loews (not Lowes) and Leucadia (now Jefferies) spring to mind, too.

But to be fair, we shouldn't fall for survivorship bias. It has worked out astoundingly well with Berkshire, but it might not have. We didn't know the future, we just guessed it, and our guess turned out to have been correct.

Jim

At least painful lessons like these helped me find Buffett & Berkshire shortly thereafter!

Same for a lot of us. I think mine was the Third Avenue Value Fund. Loews (not Lowes) and Leucadia (now Jefferies) spring to mind, too.

But to be fair, we shouldn't fall for survivorship bias. It has worked out astoundingly well with Berkshire, but it might not have. We didn't know the future, we just guessed it, and our guess turned out to have been correct.


Memories! I used to have my biggest investment in Berkshire, but I also had substantial investments in three of the often-cited mini-Berkshires, which were Fairfax, Loews, and Leucadia; for some reason, I never like Markel management and never bought it. Am I missing any other Berkshire look-alikes?

Anyways, Berkshire has done well, but in fact so have the other 3 I owned, and so has Markel. Looking from 2001-01-19 (25 years ago, and roughly the time I remember owning them), Berkshire is up 979%, or 10.0%, which is much better than the S&P 500 (total return), up only 711%, or 8.7%. But it is not the best performer of the five.

That would be Fairfax, which has become my biggest investment, partly by choice, but partly by increasing 1245% in the first 21st century, which is 11.0% a year.

Market did almost as well, in second place with a return of 1167%, 10.7%/year.

Berkshire was third at 10.0%, and then Leucadia, now Jefferies, at 837%, or 9.4%/year.

The S&P 500 total return index would have provided a 711% return, or 8.7%/year, and Loews returned 707%, also 8.7%/year, just a hair behind the index.

Different start dates from my arbitrary one 25 years ago would give slightly different results, but all things considered, despite the big run-up in the S&P in recent years, all 5 of these big value conglomerates have done pretty well, even without survivorship bias.

Regards, DTB

Gemini reports the following on Joel's value weighted "index" funds: As of January 2026, Joel Greenblatt’s Gotham funds continue to follow his systematic, value-driven framework. Both **GSPFX** and **GARIX** are designed to capture the "value spread" (the difference between what a business is worth and its market price), but they do so with very different risk profiles.

Below is the performance comparison against the **VOO (S&P 500)** based on recent trailing data.

### **Trailing Annualized Returns (CAGR)**

*Data as of December 31, 2025 / January 2026*

| Fund / Benchmark | 1-Year | 3-Year | 5-Year | Since Inception |
| --- | --- | --- | --- | --- |
| **GSPFX** (Enhanced S&P 500) | 16.88% | 21.80% | 14.51% | ~15.05% |
| **GARIX** (Absolute Return) | 16.24% | 16.65% | 14.74% | ~9.01% |
| **VOO** (S&P 500 Index) | 17.88% | 23.01% | 14.42% | ~15.14% (since 2016) |

---

### **Fund Analysis & Key Differences**

#### **1. GSPFX: Gotham Enhanced S&P 500 Index**

This is an "Index Plus" strategy. It holds all the stocks in the S&P 500 but **re-weights** them based on Greenblatt's value and quality metrics.

* **Performance vs. VOO:** Over the 5-year period, it has slightly outperformed the index (14.51% vs. 14.42%). However, over the 1-year and 3-year periods, it has slightly lagged. This is typical when mega-cap "Growth" stocks (which Greenblatt might find "expensive") lead the market rally, as his system will naturally underweight them relative to the cap-weighted index.
* **Strategy:** It aims to beat the S&P 500 by simply owning "more of the cheap ones and less of the expensive ones."

#### **2. GARIX: Gotham Absolute Return Fund**

This is a **Long/Short** equity fund. For every $100 you invest, the fund typically buys ~$120 of "cheap" stocks and shorts ~$60 of "expensive" stocks.

* **Risk Profile:** It is designed to be less volatile than the S&P 500. It targets a "net long" exposure of about 50–60%.
* **Performance:** You'll notice its 10-year and "Since Inception" returns (9.01%) are significantly lower than the S&P 500. This is by design—it is not intended to keep up with a raging bull market, but rather to provide steadier, risk-adjusted returns with lower drawdowns.

### **Summary for Investors**

* If you want **index-like returns with a value tilt**, **GSPFX** is the closer alternative to a market-cap fund.
* If you want **lower volatility and a hedge** against market drops, **GARIX** is the structural alternative.

**Would you like me to look up the current "Value Spread" Gotham is reporting for these funds to see if they believe the market is currently overvalued?**

" My excuse - I was busy running a business and having kids, and decided to farm out investment management*. Longleaf seemed to fit the bill - value investors, concentrated portfolio, "eat their own cooking"

That was my exact scenario 25 yrs ago +/- and I had a similar, but briefer experience with Longleaf and many other highly regarded so called Value Investors. I say 'so called' because after you got invested with them and got passed all the rational sounding pontificating.... that is really marketing....they were very far doing what smaller or younger Buffett and Munger would do. I had studied Warren and Charlie for decades, but like you was busy running a business and raising a family. Once I got all of that squared away I went to full-time investing the Munger way and it has outperformed all the previously referenced investors and the SP500 TR.

JP Morgan has a GARP fund (JPGSX) which is not an unmanaged index, but is plenty diversified and has outperformed VOO. If I became incapacitated, I would direct a sizable portion of my portfolio there. Strangely enough, I only really learned about that fund because AI Chatbots used them as a comp for my own funds performance, so I looked into it a bit.

JP Morgan has a GARP fund (JPGSX) which is not an unmanaged index, but is plenty diversified and has outperformed VOO.

60% of the fund is in the top ten stocks, mostly Mag7. Seems a bit risky. No denying it has done well, though.

Let's say Charlie Munger was an extremist when it came to concentration. He thought you were perfectly well diversified if you owned 3 great assets you really knew something about.

Have you ever looked at Berkshires holdings and subtracted the Ted/Todd and or Lou Simpson holdings. He has huge positions in generally 5-8 names...and that's with all those billions. Now of course,we do have 70+ operating companies, but that's a different game. With the operating companies he's running a museum for business owners who don't want to see if broken up and sold off.

I have the exact quote at my office, but he essentially said this:
In a 2008 discussion (echoing similar sentiments from earlier years, like 1998), Buffett emphasized concentration for skilled investors:

He and Charlie Munger "operated mostly with five positions."
If he were running $50 million, $100 million, or $200 million, he would put 80% of the money in five positions, with the largest single position at around 25%. JPGSX is bigger than that now, but I would argue the same concentration principles basically apply.

Thank you once again, Jim.

The Arnott et al. article is here:
https://thereformedbroker.com/wp-content/uploads/2...

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