> I found S&P 500 Equal Weight to be pretty attractive.
The rebalancing required to maintain equal weights means constantly selling your winners and buying more of your losers. That creates volatility drag. Stock returns are highly skewed: only about 4% of stocks outperform the market, and are responsible for most of its gains. By keeping your allocation to those stocks small through constant rebalancing, you are missing out on a large part of their gains. The vast majority of stocks underperform.
Maintaining the equal weighting also requires constant trading, which generally means higher fees. A market weighted fund, in contrast, naturally maintains its desired balance in response to price movements, without any trading.
Also, the equal weighting ignores the amount of outstanding float for each company. If the fact that NASDAQ has not (historically) been float-adjusted (a common anti-SpaceX talking point) gave you concern, this is even worse, due to the multiple orders of magnitude difference between the largest and smallest companies in the S&P. If enough money enters the equal-weight index, this can spark large amounts of buying in (relatively) small companies that is divorced from their economic performance.
The equal-weight index has outperformed the market-weighted index in some periods (not in recent memory), but with higher volatility (so worse risk-adjusted returns). That outperformance can mostly be explained by factor tilts implicit in the equal weighting (e.g., a higher allocation to mid-cap value stocks).
You would probably be better off with a mix of market-weighted funds explicitly designed to give you the factor tilts and risk exposure you want.
If big tech ends up seeing a 40-50% draw down in the next 2-3 years, what ETF is best equipped to limit the blast radius?
airstrike
today at 4:06 PM
This isn't financial advice, but if they dropped 40-50%, things like consumer staples would go up. In fact, they did this Friday, when everything else melted.
The best defensive stock for those situations is WMT, but you can think of other similar names as you reason through the why. That's where I'd go. There are many ETFs such as VDC (Vanguard Consumer Staples).
If you don't want to be so defensive, you could go VTV which is basically "large cap value stocks" so it still includes some Tech like Intel but it's way more diversified into other industries.
Gold is more inflation-related, so I wouldn't go there, at least not for the 40-50% draw down scenario you're describing.
I think a tricky thing is names like WMT, COST, TJX already have high p/e ratios.
You could usually try utilities or energy but those are also high due to AI buildout & Iran.
I think gold could make a come back since it's beating down a bit this year. Treasuries or just a reasonable hedge with puts against your holdings may be the best bet.
Of course none of this is financial advice & is just open discussion looking for thoughts.
floatingtorch
today at 4:05 PM
Small cap value did well in the 2000 tech crash and SP600 (small cap) doesnât have many direct datacenter or AI exposed names compared to large and mid cap indexes. But given the scale of capex across the US they arenât immune from secondary effects.
outside1234
today at 2:22 PM
Probably an international fund like VEA that is much more diversified.
floatingtorch
today at 4:09 PM
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I think there are no safe harbor investments at this time. Even gold is unpredictable.
Personally I went 80% world excl US and 20% equal weight S&P500 to hedge against what I think is an AI bubble. But if the market decides to adjust Nvidia's valuation 20% downward next week, I expect there to be ripple effects throughout the economy.
(Like the .com bubble, I think the tech is genuinely transformative and here to stay, but the valuations are just ridiculous.)
cfiggers
today at 12:20 PM
I think you're missing the feature of equal-weight index that your parent comment is attracted toâwhich is a sense that the market generally is out of balance toward AI investment at the moment and that there's a correction coming, which the equal-weight index will have less exposure to.
Your concerns sound valid provided things continue on as they have (I'm not a financial advisor and this is not financial advice) but the commenters above you are specifically worried that it's not going to do that. In which case, the disadvantages you point out of the equal-weight index will be handily outweighed. If an AI bubble popping causes the market-weighted funds to suffer, it doesn't matter that we've avoided trading fees along the way.
cool_dude85
today at 12:59 PM
Selling winners and buying losers sounds an awful lot like "buy low, sell high".
Company performance doesnt follow a uniform distribution where each company is as likely to overperform as any other. Selling companies that are run well because their stock went up is a great way to miss out on a lot of money.
cool_dude85
today at 2:13 PM
If you're reliably beating the market over a long time horizon by picking specific stocks, you're a billionaire, or soon to be.
This is a non sequitur. We are talking about the standard weight s&p 500 vs an equal weight s&p500
potatoman22
today at 3:59 PM
Picking an equal weight fund is closer to picking specific stocks than investing in the S&P500 imo