Comparing mean–variance portfolios and equal-weight portfolios for major US equity indexes

Abstract

We compared performance of mean–variance portfolios (MVPs) based on Pearson’s correlations (PeMVPs) and partial correlations (PaMVPs) with equal-weight portfolios (EWPs) for several tradable US equity index ETFs. We found that performance of MVPs and EWPs depends on two factors: the constituents of the underlying equity index and its holding period. When a market-wide index contained super-high growth technology stocks, such as FAANNG in the SPDR S&P 500 ETF, PeMVP being a concentrated growth portfolio unsurprisingly outperformed more diversified PaMVP and EWP. However, when FAANNG were dropped from the SPDR S&P 500 ETF, and even in the case of the SPDR S&P 500 Growth ETF (that does not have relatively low-performing value stocks), PaMVP outperformed PeMVP at one-month holding period. For other US equity index SPDR ETFs (S&P 500 Value, S&P MidCap 400, and S&P 600 SmallCap), PaMVP was always superior, and EWP could outperform PeMVP at shorter holding periods.

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Acknowledgements

We are grateful to anonymous reviewers for valuable comments.

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Correspondence to Anatoly B. Schmidt.

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Cai, H., Schmidt, A.B. Comparing mean–variance portfolios and equal-weight portfolios for major US equity indexes. J Asset Manag 21, 326–332 (2020). https://doi.org/10.1057/s41260-020-00173-2

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Keywords

  • Mean–variance portfolio
  • Equal-weight portfolio
  • Partial correlations
  • Out-of-sample performance

JEL Classification

  • G11