An index that tracks SP500 minus the Mag7

[rogermunibond]

Is there an index or tracker that shows the SP500 performance minus the big seven tech stocks?

 

Doesn't have to be SP could also be MSCI.

[TwoCitiesCapital]

I've seen some charts that do this, but I don't think any actual index would. Just people adjusting index data to remove those names. 

 

Your best bet would be the equal-weight index which reduces their portfolio weight from 25-30% of the index down to ~1.4% which is functionally removing most of their impact. 

Edited November 17, 2023 by TwoCitiesCapital

[rkbabang]

I always wondered how an inverse-weighted-SP500 index would do.   The smallest companies weighted higher and the larger weighted lower.  Give the 500th company the weighting that the 1st is now and the 499th the weighting of the 2nd, etc all the way up with the current 1st company weighted what the 500th is now.  You would capture the smaller companies growing and while you would own some of the mega-caps you wouldn't be limited to the law of large numbers.  Some of the companies toward the bottom could grow tremendously while there is a limit to how much a $2T company can grow.  I suppose you could create this on a spreadsheet and back test it.  But I'm not THAT interested. 

 

[ValueArb]

The guy who thought up SARK to short ARKK created a lucrative ETF out of it.

 

Who wants to help me create SMAG7, an ETF that owns the SP500 while shorting out the effect of the Magnificent 7?

[Spekulatius]

51 minutes ago, rkbabang said:

I always wondered how an inverse-weighted-SP500 index would do.   The smallest companies weighted higher and the larger weighted lower.  Give the 500th company the weighting that the 1st is now and the 499th the weighting of the 2nd, etc all the way up with the current 1st company weighted what the 500th is now.  You would capture the smaller companies growing and while you would own some of the mega-caps you wouldn't be limited to the law of large numbers.  Some of the companies toward the bottom could grow tremendously while there is a limit to how much a $2T company can grow.  I suppose you could create this on a spreadsheet and back test it.  But I'm not THAT interested. 

 

Not scaleable. Imagine people buying such a vehicle in size, the smaller caps would probably increase way above the fair value. Even if people would dump a lot of money into an equal weighted index funds, it would lead to distortions for lower caps and small float stocks.

 

It is amazing how well the simple low cost market weighted index fund works by harvesting essentially the wisdom of the crowds.

 

I do agree with @TwoCitiesCapital that the most practical way of reducing the impact of the Mag7 is to buy an equal weighted index fund right now.

Edited November 17, 2023 by Spekulatius

[rkbabang]

14 minutes ago, Spekulatius said:

Not scaleable. Imagine people buying such a vehicle in size, the smaller caps would probably increase way above the fair value. Even if people would dump a lot of money into an equal weighted index funds, it would lead to distortions for lower caps and small float stocks.

 

It is amazing how well the simple low cost market weighted index fund works by harvesting essentially the wisdom of the crowds.

 

I do agree with @TwoCitiesCapital that the most practical way of reducing the impact of the Mag7 is to buy an equal weighted index fund right now.

 

 

Yes, it wouldn't work if people piled into it in size.   And I wouldn't want the bottom 7 weighted that heavily anyway.  I wonder if you could skew an almost equal weight ETF toward the bottom a little.  Instead of each of the 500 companies being weighted 0.2%, have the bottom 250 being weighted 0.215% and the top 250 weighted at 0.185% or something like that.

 

[Spekulatius]

16 minutes ago, rkbabang said:

 

 

Yes, it wouldn't work if people piled into it in size.   And I wouldn't want the bottom 7 weighted that heavily anyway.  I wonder if you could skew an almost equal weight ETF toward the bottom a little.  Instead of each of the 500 companies being weighted 0.2%, have the bottom 250 being weighted 0.215% and the top 250 weighted at 0.185% or something like that.

 

I forgot who it was, but there was one podcast guest who suggested to value companies based on their "economic footprint" rather than market cap with metrics like revenue, equity, employees, profits etc and construct a value index that way.

 

So far everything I have seen has underperformed market cap weighting so....

Edited November 17, 2023 by Spekulatius

[CorpRaider]

Pretty sure I heard Phil Bak talk about some research on this one or maybe a product he launched a recent podcast interview.  Maybe with Meb Faber.  I know he talked about being an early part of $RSP.

 

I think the relative performance depends on the timeframe.  If you go back to like 1993 I think RSP still wins over SPY.  You can check midcaps versus large on portfolio visualizer.  Midcaps still wint by over 100 bps from 1972 forward.

 

This is probably the 90's or nifty fifty again, but we will see.

Edited November 17, 2023 by CorpRaider

[lnofeisone]

2 hours ago, rkbabang said:

I always wondered how an inverse-weighted-SP500 index would do.   The smallest companies weighted higher and the larger weighted lower.  Give the 500th company the weighting that the 1st is now and the 499th the weighting of the 2nd, etc all the way up with the current 1st company weighted what the 500th is now.  You would capture the smaller companies growing and while you would own some of the mega-caps you wouldn't be limited to the law of large numbers.  Some of the companies toward the bottom could grow tremendously while there is a limit to how much a $2T company can grow.  I suppose you could create this on a spreadsheet and back test it.  But I'm not THAT interested. 

 

I think there is one like that already - YPS. 

[rkbabang]

15 minutes ago, lnofeisone said:

I think there is one like that already - YPS. 

 

Thanks.  

Interesting.  It looks like it has underperformed the S&P500.

https://www.etf.com/etfanalytics/etf-comparison/SPY-vs-YPS

[TwoCitiesCapital]

5 hours ago, Spekulatius said:

I forgot who it was, but there was one podcast guest who suggested to value companies based on their "economic footprint" rather than market cap with metrics like revenue, equity, employees, profits etc and construct a value index that way.

 

So far everything I have seen has underperformed market cap weighting so....

 

I believe Research Affiliates/Rob Arnott do this with their fundamental indices 

 

They rank companies on a few metrics like revenues, cash flows, book value, and dividend yields and come up with a composite ranking for each company. And then basically reweight the entire index to own larger portions of companies that have a higher composite score and lower weights to companies with lower composite scores. 

 

[mattee2264]

Everything going back 5, 10, 15 years is going to underperform a market cap weighting because we are still in a long secular bull market led by Big Tech and to a lesser extent quality stocks (aka bond proxies). Value stocks tend to be more economically sensitive and economic growth has been anaemic and with tech eating the world there has also been a lot of creative destruction with the new economy benefiting at the expense of the old economy. 

 

Chart below is quite interesting. Suggests that an equal weighted S&P 500 index tends to outperform early cycle and market cap weighted S&P 500 tends to outperform late cycle.

 

But not particularly useful as economic uncertainty has been incredibly high post pandemic. And Mag7 are still seen as all weather stocks by most.

 

Higher for longer? In a speculative market investors will still turn their nose up at a 5% guaranteed return. And Mag7 have pricing power so moderate inflation and moderate economic growth supports double digit nominal earnings growth that investors have come to expect. 

 

Soft landing? If we return to a low inflation low economic growth low interest rate environment then we've already seen that massively favours secular growers.

 

Hard landing? Tough to call. But amidst recession fears cyclicals have already sold off and Mag7 is seen as a safe haven by many. The higher quality ones are seen as utility like selling essential goods and services. The lower quality ones have such exciting long term growth themes that investors will probably look through a few recession years. And in a hard landing inflation and interest rates will probably come down which is bullish for Mag7. 

 

Take off? If we do see robust broad-based economic growth then that will favour small caps and cyclicals and with growth becoming less scarce that might moderate the multiples investors are willing to pay for Mag7. But then again growth was pretty strong in Q3 and Mag7 on the whole posted very impressive growth figures and with Tech Eating the World they will participate in any economic growth and still do well.

 

The main scenarios to worry about would be a stagflationary recession (which seems unlikely) or Mag7 collapsing under their own weight as they prove incapable of living up to the high expectations and lose their lustre. But as religion stocks and one decision stocks it will take a bit of time for investors to lose faith.