Are there any good cheap mutual funds that use equal weight or pseudo-equal weight (e.g. across sectors) strategies? Index or active.
I found ETFs like RSP and SDOG but my google power failed at finding mutual funds.
Context - http://www.cfainstitute.org/learning/products/publications/dig/Pages/dig.v44.n1.16.aspx
I believe Jeremy Siegel has mentioned some in his literature.
What sectors are you looking to cover? For example, do you want a global fund that has cap weighted equities from all over the globe? Do you want fixed income in there for a global balanced portfolio? Or are with talking about a domestic balanced or equity-only portfolio?
In short, yes, there are options for all the above. I only keep track of the active managers (many would be what most would consider enhanced index funds).
^A little off the topic, and I realize I sound like a Vanguard idiot here…
Be cognizant of asset location if you decide to invest in one of these.
That is, a market-cap weighted fund will require rebalancing, which will (hopefully) result in capital gains, and distribution of those capital gains to you. Those are taxable, albeit at preferred rates. A standard old market-cap weighted index fund doesn’t require rebalancing, so it will produce very little of the irritating capital gains distributions.
I don’t know how much of the return is lost to tax. But even if it’s 0.25% per year, that might be enough to wipe out all of the alpha you generate. But you can avoid the whole problem by holding it in an IRA.
@Greenie: I understand. I am looking to hold in IRA or 401K (my 401K allows any investment.)
@STL: domestic equity. Unless there is a fund holding international equity in countries with a US tax treay, or takes care of reclaiming foreign withholding taxes if no treaty. I doubt there is.
No fixed income. But wouldn’t almost all fixed income funds be considered “equal weight” anyway? They certainly don’t invest based on market cap. Unless you mean equal-weighted by credit rating (10% AAA, 10% AA etc).
So a portfolio of US equities with equal weighting across sectors…Just to be clear, are you looking for a fund that holds 10% in each of the 10 sectors, or one that closely mirrors a major index? It would be difficult to find a fund that consistently holds 10% in utilities, for example, when it only makes up 3% of the S&P 500. Or, cutting your exposure to IT from 20% to 10%.
If that’s what you’re looking for, I can’t help you. If you’re looking for something along the lines of an enhanced index, then I could point you to a few.
Edit: Same goes for fixed income. You can either mirror the Barclays Agg (or whatever index you want) or you could equal weight exposure to credit or sector (Treasuries, MBS, credit, CMBS, ABS, etc…).
You know, Personal Capital started spam calling me and the FA tried to sell this balanced sector approach to me. It was kind of frustrating. I’m like “why is that better”, and the guy says “well, this is so you have equal exposure to all sectors” (i.e. the definition of the strategy). Then, I am like “yes, but why is that better?”. Then repeat for the next 20 minutes. It’s kind of sketchy, because the guy looked up my net worth and asset allocation from the Personal Capital account and called me based on that. I did buy some IWM though, after the guy said it is good to diversify this way (I had been thinking about that before though). Then IWM immediately goes down. F* this.
OP, maybe instead of buying one ETF, if you are sufficiently capitalized, perhaps you could buy SPY and then supplement this with ETFs for sectors that you think are under represented.
Seems like a good idea
I seem to recall that equal weighted indexes tend to outperform capweighted indexes, at least before transaction costs.
Part of it is probably due to the fact that equal weighted indexes are almost by definition tilted to small cap indexes and therefore capture some of the small cap premium.
The other argument - which is more AQR’s line - is that overvalued stocks by definition have higher prices than they should, so a cap-weighted index will tend to overrepresent overvalued stocks and underreprestent undervalued ones. An equal weighted index should naturally tend to counterbalance that, although high-priced stocks that are fairly valued will also be underweighted, and fairly-valued low-priced stock will be overweight.
SDOG ftw