Secret Rebalancing

Excerpt of an article I saw today over at a new blog I'm following, Capital Spectator.com.  By-the-way, I found this via the Reformed Broker.com.  {My highlights in green.}

The Biggest Little Secret In Money Management

"It happens all the time. A new strategy emerges from the obscure recesses of the research caverns and morphs into an ETF, mutual fund, or a separate account program..... But when you peel back the details and drill down into the core of the strategy du jour, you’ll typically find a familiar combination of variables: rebalancing with one or more factor tilts.

Product vendors trying to sell new funds don’t like to talk about this, but most of what passes as enlightened money management is linked rather closely with rebalancing the individual holdings back to a fixed-weight benchmark with a particular bias.......

A simple example is comparing the standard S&P 500 stock market index to an equal-weighted strategy that's applied to the same pool of companies. As a cap-weighted benchmark, the basic S&P index is commonly described as a “passive” measure of US equities. To some extent that’s true, particularly with regards to rebalancing: there is none. Granted, individual companies come and go in this index for a variety of reasons through time, but let’s ignore that for now. When you buy an S&P 500 ETF, you’re purchasing a strategy with a specific set of rules: no rebalancing, which promotes large-cap and growth tilts.

By contrast, an equal-weighted S&P 500 ETF—the Guggenheim S&P 500 Equal Weight (RSP), for instance—has a rebalancing regimen that periodically moves the weights for each of the individual names back to something approximating a 1/500 allocation. In turn, that simple strategy promotes small-cap and value tilts—tilts that have delivered a handsome premium in recent years over the standard S&P index, by the way. In any case, these tilts are conspicuous mostly in relative terms—relative to the cap-weighted profile of the standard S&P 500 index. The point is that by adding a rebalancing strategy to a portfolio of S&P stocks, the strategy generates different results.

Some clever managers (and their marketing departments) repackage rebalancing and the associated factor tilts as their own home-grown strategies..... And just to be clear, this rebranding and repackaging (R&R) knows no bounds in the money game. Repurposing a variation of the S&P equal weight strategy as something new and improved is merely the tip of the financial iceberg. Virtually all asset classes witness some form of R&R. You'll also find this activity in the growing field of multi-asset class products.........

The bottom line is that quite a lot of what appears to be a good deal in the exploding list of “enlightened” strategies in the land of ETFs and mutual funds is just an excus to charge more for something that can be accessed less expensively and more efficiently through other means. There are exceptions, of course, and those exceptions are worth every additional penny charged. Unfortunately, finding the exceptions takes work. Par for the course in a world that’s overflowing with high-priced mediocrity that's masquerading as creative and pioneering portfolio design."

My comment:  For many of the reasons stated in this article the Guggenheim S&P 500 Equal Weight ETF {RSP} is one of our largest holdings.  I also own RSP in personal accounts.

Link:  The Biggest Little Secret in Money Management.