morning review - 102210

8/8/2019 Morning Review - 102210

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Nicholas Colas (Chief Market Strategist): 212 448 6095 or [email protected] Clark: 212 448 6085 or [email protected]

Beth Reed: 212 448 6096 or [email protected]

The accompanying table sum marizes some basic information about these ETFs, but I think it is even more interesting to track just how well these differing

approaches have done through 2010. We’ve got that information detailed in the other attachments after this note

, but here is a brief summary:

• Since all these funds invest in the same underlying equities, it should be no surprise that the correlation of daily returns is generally very high – over95% - for the year to date. The one exception is the equal-weight sector fund, most likely due to its much higher representation of the volatile Materials sector,as noted above.

• The dispersion of returns for the five ETFs listed above and the “regular way” S&P 500 fund SPY is fairly wide. The SPY is up 4.2% since the beginning ofthe year; the RSP (equal weight) is up over twice as much at 8.6%. The other funds are clustered at 4.4% to 5.5%, but every single “alternative” approach hasbested the original index thus far in 2010.

• Performance is not the only relevant factor, of course. Risk, which we measure as the standard deviation of daily returns, also plays a role in investmentdecision-making. In the attached chart you can see that the different alternative ETFs offer either lower risk for the same return as the SPY (EPS weighting) or higher returns for the same risk as the index (Revenue weighting).

• That outlier performance of the equal-weighted RSP is the result of incremental risk-taking - but not very much, really. For less than 20% more risk youhave been able to essentially double your returns so far into the year. While we don’t show it here, pull up a chart of RSP versus SPY and you will see that for2010 the RSP spent less time down on the year and, as noted, has done much better than its market-cap weighted competition. The final chart shows that smalland mid cap names have far outstripped the large cap S&P 500 in 2010. No surprise, therefore, that equal weighting makes such a difference versus the market-cap approach.

I am not ready to say that we should ditch market cap weighting altogether, but the data here is certainly a case study in how to consider portfolio composition. The same stocks, assembled in different ways, yield very different outcomes.



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Symbol Name Description Price YTD

Performance* Shares

Outstanding (mm) AUM ($mm) SPY SPDR S&P 500 S&P 500 117.41 4.24% 707.7 82,029.9

RWL RevenueShares Large Cap LargeCap Revenue Weight 21.98 5.48% 7.9 173.3

EPS WisdomTree Earnings 500 LargeCap Earnings Weight 41.33 4.35% 1.6 65.7

DLN WisdomTree LargeCap Dividend LargeCap Dividend 43.79 5.33% 10.9 472.7

RSP Rydex S&P Equal Weight S&P 500 Equal Weight 43.35 8.59% 48.6 2,117.2

EQL ALPS Equal Sector Weight ETF Equal SPDR Sector Weight 32.99 4.73% 1.5 46.5*Perform ance from 1/4/10 through 10/21/10

Overview

SPY RWL EPS DLN RSP EQLSPY - 0.99 0.95 0.98 0.99 0.90

RWL 0.99 - 0.95 0.97 0.98 0.91

EPS 0.95 0.95 - 0.95 0.95 0.92

DLN 0.98 0.97 0.95 - 0.97 0.90

RSP 0.99 0.98 0.95 0.97 - 0.91

EQL 0.90 0.91 0.92 0.90 0.91 -

Corr elation Grid



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FIXED INCOME

Source: Bloomberg

Today’s Important Economic Indicators/Events (with Consensus):None

Source: Bloomberg

Treasuries tumbled Thursday, sending benchmark 10-year yields up 7 bps to 2.55%, as investors continued to speculate whether the central bank willbegin a second round of quantitative easing to stimulate the economy. For the first time in 4 days, the yield on the long bond advanced, rising 7 bps to3.96%. After the Fed implied in Wednesday’s Beige Book that the economy showed “modest” signs of growth, St. Louis Fed President James Bullardsuggested the central bank buy $100 billion in long-term Treasuries next month and determine later if more purchases are necessary.

morning review - 102210

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