This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Why It Pays to Own More Than One Index Fund

Stocks in this article: RSP PRF PRFZ

NEW YORK ( TheStreet) -- Seeking to top the S&P 500 and other traditional benchmarks, ETF companies have developed a host of new index funds. While some have been duds, many appear to be winners.

Among the top performers are equal-weight and fundamental funds. Large-cap funds that have outpaced the S&P 500 by a comfortable margin during the past five years include Guggenheim S&P 500 Equal Weight (RSP) and PowerShares FTSE RAFI US 1000 (PRF), a fundamental fund. PowerShares FTSE RAFI US 1500 (PRFZ), a small-cap fundamental fund, outdid the S&P 600 small-cap benchmark.

Should you toss out your old-fashioned index funds? Not necessarily, says Sheldon Jacobs, author of "Investing without Wall Street" (John Wiley & Sons).

Jacobs says that traditional S&P 500 funds have excelled during some periods, while at other times fundamental and equal-weighted strategies have shined. To avoid lagging, he suggests holding a diversified mix that includes several kinds of index funds.

Jacobs notes that the S&P 500 was a star of the 1990s bull market. During the last five years of the decade, the S&P 500 returned 28.6% annually, outdoing most actively managed funds by a wide margin.

The equal-weight ETFs did not exist at the time. But there was a comparable mutual fund, Invesco Equally-Weighted S&P 500 (VADAX). It trailed the S&P 500 by 9 percentage points annually during the 5-year period.

The reason for the benchmark's stellar showing in the 1990s can be traced to its structure. Like most benchmarks, the S&P 500 weights its holdings according to market capitalizations. Under this system, stocks with larger market value carry greater weights.

Apple (AAPL), currently the biggest stock in the S&P 500, accounts for 4.4% of the assets, while car dealer AutoNation (AN) accounts for 0.01%. As a stock rises, the weighting increases.

During the late 1990s, a small number of big technology stocks came to dominate the S&P 500. As they soared, companies such as Microsoft (MSFT) and Cisco Systems (CSCO) came to account for a huge weighting in the benchmark.

By 1999, technology represented 39.6% of the S&P 500. The strong showing by a handful of stocks pulled the index to new heights. Then when technology crashed in 2000, the former stars pulled the benchmark down hard. Today technology is 18.3% of the benchmark.

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs