S&P 500 Equal-Weight Trading Strategy: Backtesting and Practical Example Insights
As the name implies, the EWI is an equal-weight version of the popular S&P 500 Index. But instead of weighting each stock in the index based on its market, every stock is given equal weight in the index. There are many ETFs that track the EWI through which you can invest in the index. History shows that the S&P 500 equal weight index has outperformed the S&P 500 market weight index. We make an S&P 500 equal-weight trading strategy.
We simply own the equal-weight index instead of the S&P 500 equal-weight. Based on history it is a good idea. The equal-weighted index has outperformed the market-weighted index!
The reason is pretty straightforward: the small-cap effect. Maintaining a high growth rate becomes harder the bigger the company gets. Thus, over time the smaller weighted stocks in the S&P 500 have grown at faster rates, and thereby generated greater stock performance than their largest peers.
Let’s look at the performance (Shown in the image below) of RSP (equal-weight ETF) vs SPY (market-weight ETF)
You can find more info about this trading strategy here:
https://www.quantifiedstrategies.com/sp-500-equal-weight-trading-strategy/