A Better Way to Equal Weight?
14 November 2024
Read Time 4 MIN
Equal Weight is the Remedy for the Market’s Current Concentration Risk
The S&P 500 has reached all-time highs multiple times this year, but much of the broad market's returns have been driven by a select few companies, often referred to as the "Magnificent 7," which are primarily mega-cap technology companies. These mega-cap tech stocks have dominated performance, leaving many investors over-reliant on a small group of companies.
While this concentration has worked in the short term, it exposes market-cap-weighted indexes (like the S&P 500) to increased risk if those large companies start to underperform. For example, if there's a tech hiccup like a slowdown in demand, shrinking margins, or supply chain issues, these stocks could become vulnerable, affecting returns significantly. To put this concentration risk in context, the top 10 stocks in the S&P 500 currently account for 30%-35% of the total index.
The narrow market leadership has been particularly evident in the recent underperformance of equal-weighted strategies compared to their market-cap-weighted counterparts (see chart below). However, history suggests that market breadth can widen rapidly following such extremes. Currently, market breadth has hovered at lows not seen since COVID (2020) and the Dot-com boom (1999/2000).
Narrow Leadership: S&P 500 Equal Weighted Index Rolling 1 Year Excess Returns vs. S&P 500 Index / 1/1990 - 9/2024
Source: Morningstar. Data as of 30 September 2024. Past performance is not a guarantee of future results. Index performance is not illustrative of strategy performance. It is not possible to invest in an index. The S&P 500 Index consists of 500 widely held large cap United States common stocks covering a variety of sectors. The S&P 500 Equal Weighted Index is an equally weighted version of the market-cap weighted S&P 500 Index. Any projections shown are for illustrative purposes only and are not intended as predictions of future results or events.
Contrary to a market-cap index, an equal-weighted strategy assigns the same percentage to each stock in a portfolio, regardless of the company's size, giving smaller companies the same influence as larger ones. This approach spreads risk evenly across all holdings and provides greater exposure to a more diversified basket of stocks.
Not All Equal Weight Strategies are Created Equal
The VanEck Morningstar US Wide Moat UCITS ETF (MOTU) applies an equal-weight approach that has historically delivered several key benefits:
- Historical Outperformance: Since its inception in 2007, the Moat Index's equal-weighted strategy has delivered higher returns in 11 out of 18 years compared to the market-cap-weighted S&P 500 Index. This suggests that equal weighting can offer stronger long-term growth potential.
- Improved Risk-Adjusted Returns: Equal weighting often leads to a higher Sharpe ratio, a key measure of risk-adjusted performance, when compared to market-cap-weighted indexes. This means investors can potentially earn higher returns without taking on additional risk.
- Diversification Potential: By reducing reliance on any single stock, equal-weighted strategies offer significant diversification benefits. This can protect portfolios from the volatility associated with mega-cap stocks and help spread risk more evenly across a broader set of companies.
- Main Risk Factors: Equity market risk, limited diversification risk, foreign currency risk. Please refer to the KID and the Prospectus for other important information before investing.
While other equal-weight strategies can deliver similar advantages, it’s important for investors to realize that not all equal-weighted strategies perform the same. For example, MOAT takes an equal-weighted approach, but with a focus on companies that have sustainable competitive advantages or "economic moats." This approach, combined with an emphasis on attractive valuations, gives the Wide Moat ETF a slight value bias and has steered it away from mega-cap companies.
Although this positioning has been a headwind in 2024 due to the dominance of the "Magnificent 7," it could prove beneficial as market dynamics shift. Over the past decade, Wide Moat Focus Index has outperformed the S&P 500 Equal Weight Index by an impressive 80+ percentage points when it comes to cumulative returns, highlighting the potential of equal-weighted strategies that focus on high-quality companies with sustainable competitive advantages that are trading at attractive valuations. Remember that past performance is not indicative of future results and that capital is at risk when investing in Moat strategies.
MOAT Has Dominated The S&P 500 Equal Weight Index Over the Past Decade
Source: Morningstar. Data as of 30 September 2024. Past performance is not a guarantee of future results. Index performance is not illustrative of strategy performance. It is not possible to invest in an index.
VanEck is proud to be a pioneer in the moat investment space, bringing the first Moat ETF to Europe in 2015. All VanEck’s moat strategies are powered by Morningstar’s powerful research lens across different investment styles, market capitalizations and geographical regions to provide investors with a wide array of solutions to meet different investment objectives.
IMPORTANT INFORMATION
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions.
This information originates from VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) which is authorised and regulated by the Financial Conduct Authority in the UK. The information is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice. VanEck Securities UK Limited and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
The Morningstar® Wide Moat Focus IndexSM are service marks of Morningstar, Inc. and have been licensed for use for certain purposes by VanEck. VanEck Morningstar US Wide Moat UCITS ETF (the “ETF”) is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in the ETF.
Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc. and have been licensed for use for certain purposes by VanEck. VanEck Morningstar US SMID Moat UCITS ETF (the “ETF”) is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in the ETF.
The S&P 500 Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
It is not possible to invest directly in an index.
Investors must read the sales prospectus and key investor information before investing in a fund. These can be obtained free of charge at www.vaneck.com, from the local information agent Computershare Investor Services PLC or from the Management Company.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck Securities UK Limited
Important Disclosure
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions.
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions. This information originates from VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) which is authorised and regulated by the Financial Conduct Authority in the UK. The information is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice. VanEck Securities UK Limited and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Sustainable Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets. Investors must read the sales prospectus and key investor information before investing in a fund. These can be obtained free of charge at www.vaneck.com, from the local information agent Computershare Investor Services PLC or from the Management Company.
Morningstar® US Sustainability Moat Focus Index is a trade mark of Morningstar Inc. and has been licensed for use for certain purposes by VanEck. VanEck Morningstar US Sustainable Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability in VanEck Morningstar US Sustainable Wide Moat UCITS ETF.
Effective December 17, 2021 the Morningstar® Wide Moat Focus IndexTM has been replaced with the Morningstar® US Sustainability Moat Focus Index.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.
It is not possible to invest directly in an index.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck Securities UK Limited
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