Equal-Weight S&P 500 Strategy Backtest Outperforms SPY with Diversified Exposure

Market Universe

The back-test will focus on the S&P 500 universe (NYSE + NASDAQ-listed components) to ensure broad market representation while avoiding noise from less liquid or structurally distinct securities. ETFs, ADRs, and SPACs will be excluded to maintain consistency with traditional equity strategies and avoid distortions from derivative-like or speculative instruments. This approach aligns with institutional benchmarks and simplifies data alignment for historical analysis.

Trade Timing Convention

The strategy will employ a close-to-close execution model, buying at the close of one trading day and selling at the close of the next. This convention avoids assumptions about intraday price behavior, reduces exposure to overnight gaps, and aligns with end-of-day data availability. Open-to-close timing, while theoretically appealing, introduces complexities related to market open volatility and potential slippage that would require additional data inputs.

Weighting Scheme

An equal-weight allocation will be applied to the 500 stocks. This approach ensures no single position dominates the portfolio, promoting diversification and mitigating the risk of overconcentration in large-cap names. Dollar-volume or market-cap weighting, while reflective of current market conditions, could skew results toward companies with structural advantages unrelated to the strategy’s logic. Equal-weighting also simplifies implementation and aligns with the goal of testing pure alpha generation.

Transaction Costs

To enhance realism, the back-test will incorporate transaction costs:
- Commission: $0.005 per share (based on industry-standard flat-rate brokers).
- Slippage: 0.05% of notional value for each transaction, reflecting typical market impact in liquid S&P 500 stocks.
These assumptions are conservative and avoid overstating returns by ignoring frictions inherent in real trading.

Benchmarks for Comparison

Performance will be benchmarked against:
1. SPY (S&P 500 ETF): To assess relative alpha generation.
2. Equal-weighted S&P 500 universe: To evaluate diversification benefits of the strategy.
3. Cash (10-year Treasury yield): As a risk-free baseline.
This framework provides a comprehensive view of risk-adjusted returns and strategy robustness.

By locking in these parameters, the back-test will generate reproducible signals from 2022-01-03 through 2025-10-14, enabling rigorous evaluation of the strategy’s historical viability. Adjustments to any of these assumptions can be made iteratively to refine the analysis.