Well...Actually (Equal-Weight & High Dividend Factor Edition)

February 2, 2020

From the desk of Tom Bruni @BruniCharting

This week I saw two different charts floating around that I thought deserved a second look based on how they were presented and what their ultimate conclusion was.

The first has to deal with the underperformance of the Equal-Weighted S&P 500 Index, while the second looks at High Dividend Factor ETFs that have gone off the beaten path.

First, let's tackle the Equal-Weighted S&P 500 vs Cap-Weighted ratio (RSP/SPY) breaking to 10-year + lows. This is being labeled as a lack of sufficient breadth by alarmists and a signal of the calamity to come for stocks. The problem is, the data doesn't support that view.

Click on chart to enlarge view.

In fact, it's completely normal for the best players (largest stocks) to score most of the points. Sure, it makes things easier if you some participation from players off the bench, but you don't need those players to be the stars of the game to win.

Where problems develop is when these "secondary players" don't participate on an absolute basis. That's just not the case today.

Look below at an overlay of the Equal-Weighted S&P 500 and Cap-Weighted S&P 500 charts over the last 10 years. Can you tell which is which? No, because they're both trending to the upside and in long-term uptrends.

Anyone who is sounding the alarm bells because of the Equal-Weighted Indexes underperforming is either ignorant of the data or is being intentionally obtuse to it. Either way, pay it no mind. If you're going to be bearish stocks, here and some valid reasons that we've pointed out over the last week (Feb 1, Jan 27, Jan 26, and Jan 25).

The other thing I wanted to point out this week is the importance of knowing what you own and how that vehicle accomplishes (or doesn't accomplish) what it is supposed to do.

Here's the iShare Core High Dividend ETF (HDV) which seeks to track the investment results of an index composed of relatively high dividend-paying U.S. equities. Given the fall in Interest Rates, most would expect a vehicle designed to provide income for investors to perform well, maybe even outperform. That has not been the case though.

Instead, its relative performance peaked a month after US Interest Rates did in November 2018 and has been trending lower since. Not exactly the "income replacement" that investors looking for yield. The driver? 22% of its holdings are in Energy. That'll do it.

The lesson here is that it literally pays to understand how the financial products you own operate.

More importantly, it pays to exercise professional skepticism and question things in markets and life, even if conventional wisdom seems right. You never know, the data might suggest otherwise as it did in these two cases.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team