Smart-beta upstart goes after the big boys wielding lower fees as a weapon

Equal-weighted exposure to the S&P 500 for 30 basis points

Sep 10, 2015 @ 4:33 pm

By Jeff Benjamin

+ Zoom

After eight years of struggling to outperform the S&P 500, Mike Willis has decided to use the benchmark against itself by equal-weighting all 500 stocks in the index.

The strategy is a variation of so-called smart beta because it tweaks the traditional index model of weightings based on market capitalization, meaning that the largest companies in the index are proportionally represented.

Mr. Willis, president and lead portfolio manager at Index Funds, launched the Index Funds S&P 500 Equal Weight Fund (INDEX) in April with $3 million worth of seed capital, and is now ready to start taking his latest venture out on the open road.

Prior to venturing into the smart-beta space, Mr. Willis headed up The Willis Group, where he ran two funds of funds.

The Giant 5 Total Index Fund and Giant 5 Total Investment Fund, which combined for $65 million in assets, both were closed earlier this year.

Most notable about the new fund, aside from the uniquely ideal ticker symbol, which Mr. Willis described as a “gift from God,” is that the fund is squaring off with two existing products that already offer equal-weighted exposure to the S&P: the $4.7 billion Invesco Equal-Weighted S&P 500 Fund (VADAX), and the $9.3 billion Guggenheim S&P 500 Equal Weighted ETF (RSP).

Both competitor products have track records that distinguish them in all the ways one might expect from a cap-weighted benchmark, and there is no reason to believe the same won't continue to be true for Mr. Willis' fund.

COMPETING ON PRICE

So how does Mr. Willis plan to compete with such asset management powerhouses as Guggenheim and Invesco?

“We're 10 basis points cheaper than Guggenheim and 26 basis points cheaper than Invesco,” he said.

That's right, thanks to an expense waiver agreement with the fund's adviser, The Index Group, of which Mr. Willis is also the president, the new fund is committed to charging just 30 basis points for as long as it takes.

“We will need to get to $500 million before the expense starts to make sense, but we're fully committed to seeing it through,” he said. “Our real target is $1 billion, and the goal is to get there as quickly as we can.”

Because there is already about $15 billion invested between the two competitor products, Mr. Willis doesn't think his goal is unreasonable.

The appeal of this particular brand of smart beta is crystal clear and the performance proves it does represent a variation on traditional index exposure.

This year through Thursday, the Invesco fund is down 5.34%, compared with a 4.31% drop for the S&P 500. But the equal-weighted fund outperformed the cap-weighted index in each of the past three years.

BROADER EXPOSURE

“By equal-weighting, you're getting broader exposure to the companies in the index as well as the sectors they represent,” Mr. Willis said. “We also like those bottom 200 companies from a market-cap standpoint because we like putting our money on some of the lesser-known high-growth companies.”

Beyond the fees, Mr. Willis also took a swipe at Guggenheim's ETF for getting caught up in the mysterious Aug. 24 market jolt, which sent the Dow Jones Industrial Average down 1,000 points shortly after the open, and sent the ETF briefly down 43%.

Mr. Willis said a mutual fund structure is not going to fall victim to such high-frequency trading issues because it only trades once a day.

Guggenheim's director of product development, Jordan Farris, declined to comment on the events of Aug. 24, but he did point out that there are advantages of ETF structures that allow for more flexible trading throughout the day.

Also, unlike most mutual funds and like most ETFs, the Guggenheim ETF has never paid out a taxable capital gain to shareholders.

Invesco representatives did not respond to request for comment.

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