KCR has written a blizzard of material on the increasingly dire investment implications of market capitalization weighted index funds due to the outsized performance of large stocks that now sit at brutally high multiples.

This is hardly a new topic for us. In 2014, as “smart beta” strategies became wildly popular, we penned Indexing Dilemmas, which laid out the following facts:

  • Over long horizons, equally weighted indexes beat market cap weighted indexes by nearly 2% per year
  • These excess returns were sourced from capturing value premia typically associated with smaller stocks
  • These excess returns were inconsistent and tended to dominate when value spreads were high
  • Valuation spreads between equal-weight S&P 500 ETFs and cap-weighted peers were near record lows
  • After periods where spreads were as low as in 2014, the future results of equal-weighted investment returns tended to lag value-weighted indexes badly for painfully long time horizons

Since publication, that is precisely what happened: RSP, the equal-weighted variant of SPY, has underperformed for nearly 9 straight years.[i] Looking at the data today, we find that value spreads between the S&P 500 equal weight ETF and their market cap weighted peers expanded from record lows in 2014 to merely average today. While better than 2014, we find today’s spreads in the S&P500 hardly compelling.

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The Russell 1000 Equal Weight Index vs. Cap Weighted Index

We decided to look at the Russell 1000 Large Cap Index. The Russell 1000 Index has, by definition, a larger pool of smaller-cap constituents, and their presence sent the data flying into the wilds. Let’s look at some simple performance data first.

The chart below shows the 10-year rolling returns of the Russell 1000 Equally Weighted Index minus the 10-year rolling returns of the Russell 1000 Value Weighted Index. Let’s make it simple:

  • When the line is above 0% it means the equal-weighted index is beating the value-weighted index
  • When the line is below 0% it means the value-weighted index is beating the equal-weighted index

The data chart is shocking for several reasons in our view. The first is probably the most obvious. The equal-weighted variant of the index is losing by an amount last seen at the peak of the dot.com bubble. The second item we would highlight is that unlike the dot.com mania, when the equal-weighted index came roaring back after bottoming out, this cycle has ground on for years.

More specifically, the rolling excess returns of the value-weighted index have pummeled the equal-weighted variant since January 2020 through today. That is obviously 3.5 years. Yet as we will show, investors’ faith and infatuation with the market’s largest cap stocks has created an extraordinary opportunity.


So where are value spreads today vs. history?  Below we show the price-to-sales ratio of the Russell 1000 Equal Weight Index divided by the Russell 1000 Cap Weighted Index.

[i] September 16, 2014 – August 9, 2023, SPY vs. RSP