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.