A Standard, and Poor, Way of Investing

The stock market has treated investors well recently. But taking a longer view, it has been downright abusive.

Even with a gain of 4% since the start of the year, the Standard & Poor's 500-stock index has, with dividends reinvested, lost 8% since reaching its peak in October 2007. Adjust the index for inflation, and the news is worse—it has lost 18% since August 2000. Anybody who put money into an S&P 500 index fund between late 1998 and early 2001 remains in the red.



When was the last time that so much time elapsed and the U.S. stock market still remained below its inflation-adjusted peak? Never, according to the monthly price and return data from Yale University economist Robert Shiller's reconstruction of the S&P 500 back to 1871. Even investors who bought on the eve of the 1929 crash were briefly above water, in inflation-adjusted terms, in 1937. Of course, since this owes to the deflation experienced during the Great Depression, strictly speaking the mattress was still a better place to put your money.

But while the stock market has been faring poorly, stocks have been doing better. The equal-weighted S&P 500 index, which puts all stocks on the same footing rather than weighting them by market capitalization, has beaten the regular index hands down. Since August 2000, it has returned an inflation-adjusted 52%.

A big reason the equal-weighted S&P has outperformed is that it's a sneaky way of value investing. In the late 1990s, retail investors who bought a vanilla S&P 500 fund, along with investment managers who benchmarked the sector weightings in their portfolios to the index, were loading up on expensive technology stocks. In the mid 2000s, they were buying heavily into the shares of housing and finance-related companies.

Exchange-traded funds may only be making the market more top heavy. Weighing in at $417 billion, the company with the largest market capitalization in the S&P 500 these days is Exxon Mobil. It is, according to ETF Database, among the top-10 holdings of 85 ETFs. (Fun fact: That includes both the WisdomTree LargeCap Growth Fund and the WisdomTree LargeCap Value Fund.) When investors put money into any one of them, they are giving Exxon shares another incremental boost. In contrast, biotech firm PerkinElmer—with a market cap of $2.6 billion and one of the smaller companies in the index—is in the top-10 holdings of just one ETF.

There are a handful of investors who control such huge pools of money that their portfolios can't help but shadow the market-capitalization weighted S&P 500. For the rest, there is no excuse.

Source: http://online.wsj.com/article/SB10001424052970203750404577173053976605904.html?mod=WSJ_Heard_LEFTSecondNews