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
PowerShares FTSE RAFI US 1000
, a fundamental fund.
PowerShares FTSE RAFI US 1500
, a small-cap fundamental fund, outdid the
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
. 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.
, currently the biggest stock in the S&P 500, accounts for 4.4% of the assets, while car dealer
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
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.