ETF Scorecard: May 2011
In this section of ETF Edge, we take a look at the monthly and year-to-date performances of various ETFs targeting the U.S. and international equity markets. In addition to segmenting ETFs by market capitalization, we also analyze the performance of funds implementing various weighting methodologies. Though the vast majority of equity ETF assets are in funds linked to cap-weighted indexes, investors have begun to examine the alternative weighting methodologies more closely. Often, the impact of the weighting methodology on bottom line returns can be significant, as demonstrated by the performance gaps in the adjacent table.
Equities across the board took a hit during the first half of the April. Mid and small caps managed to recover nicely and even post respectable gains for the month, while their large cap counterparts struggled to end flat. Mid caps continue to dominate in terms of performance, in fact, this group has returned an impressive 12%+ year-to-date.
It is noted that the introduction of two new Rydex ETFs has given investors ETF options for equal-weighted exposure to small cap and mid cap stocks. In the large cap column, equal weighting was the big winner in 2010; RSP beat the market cap weighted SPY by about 600 basis points last year. So far in 2010, however, the cap-weighted ETF appears to be holding its ground against the alternative methodologies. Then again, many alternative weighting methodologies beat their cap-weighted counterparts by significant margins. Dividend weighting performed very well in the large cap segment last month, but not so well among small caps. The huge deltas among small cap ETFs depending on methodology highlights the potentially enormous impact that weighting methodologies can have on a portfolio.
Equal weighting also continues to dominate in the large cap category–RSP is now up about 150 basis points on SPY–but has struggled in the small cap arena.
From a regional perspective, developed markets rebounded after a brutal March, boosted by stellar performances from a number of Western European economies. And the U.S. stock market continues to climb higher, with large caps expanding the gap relative to emerging markets. Again, the significant gaps between large cap stocks and small cap stocks in emerging markets highlights the ability to round out exposure to the developing world by including both types of ETFs. Though small caps have lagged behind so far in 2011, they outgained large caps by a material margin last month.
From a style perspective, growth stocks were once again among the strongest performers last month, particularly in U.S. markets. Across all three major regions (U.S., developed markets, and emerging markets) the gap between value and growth equities last month was at least 60 basis points, highlighting the potentially major impact this bifurcation can have on equity markets: