Equal Weighted Indices Versus Market Capitalization Weighted Indices: Which Index Provided the Best Risk Adjusted Returns, the S&P 500 Equal Weighted or the S&P 500 Capitalization Weighted Index

Abstract

This study compares the returns of equal weighted indices versus market capitalization weighted indices. It compares the S&P 500 market weight index with the S&P 500 equal weight index, 2003-2021. In addition, a comparison was made between the SPDR S&P 500 market weight ETF and the Invesco S&P 500 equal weight ETF for varying time periods to analyze the behavior of the indices and to assess which index provided the best return on investment. The study found that on a risk-adjusted basis the mean weekly Sharpe ratios were not significantly different for the S&P 500 market weight index as compared to the S&P 500 equal weighted index for four of the five periods tested. However, for the period from April 2009 to March 2020 the S&P 500 index Sharpe ratio was statistically significant which indicated on a risk adjusted basis the capitalization weighted index outperformed the S&P 500 equal weighted index.