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There's no magic in equal-weighted index funds

There's no magic in equal-weighted index funds


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This article was posted September 1, 2017.

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I recently noticed that the Guggenheim S&P 500 Equal Weight ETF halved its annual expense ratio in June from 0.400% to 0.200% That's still 5 times the 0.040% expense ratio you'd get in a Vanguard S&P 500 index fund (VOO). Is there some "secret sauce" in the Guggenheim product that makes it worth 5 times Vanguard's fees?

Of course not. All an equal-weighted S&P 500 index fund does is over-weight the mid-cap stocks in the portfolio. You could do that at less cost by combining a standard S&P 500 index fund (VFIAX) with a mid-cap index fund ((VO) in approximately a ratio of 25% S&P 500/75% mid-cap. That results in a combined expense ratio of 0.055%. You can verify the asset allocations of the funds with Morningstar's Style Details.

Guggenheim S&P 500 Equal Weight ETF (RSP)
http://portfolios.morningstar.com/fund/summary?t=RSP®ion=usa&culture=en-US&ops=&cur=USD&productcode=COM

Vanguard S&P 500 Index Fund (VOO)
http://portfolios.morningstar.com/fund/summary?t=RSP®ion=usa&culture=en-US&ops=&cur=USD&productcode=COM

Vanguard Mid Cap Index Fund (VO)
http://portfolios.morningstar.com/fund/summary?t=VO®ion=usa&culture=en_US

That difference in fees really adds up over a person's lifetime. To illustrate this, you can use the Retire Early Home Page Fee & Commission Shaft Detector to evaluate the difference between a 0.200% expense ratio and a 0.055%. Over a 60-year investing horizon (i.e., 30 years saving for retirement and 30 years in retirement) that 0.145% difference in fees would likely buy you the median priced US home -- maybe two of them, depending on the size of your portfolio.









Resources for more information

Forbes: No Free Lunch From Equal Weight S&P 500 -- Outperformance of mid-cap stocks over the past decade account for Equal-Weight index fund stellar returns.


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Copyright 2017 John P. Greaney, All rights reserved.

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