Often, certain events in the market highlight alternative indexing strategies that go beyond price-weighting or market-cap weighting. In this case, one equal weight exchange traded fund (ETF) in particular is taking the spotlight.
The Rydex S&P Equal Weight ETF (NYSEArca:RSP) outperformed the market capitalization-weighted S&P 500 Index and the SPDRs (NYSEArca: SPY) in the last year — sporting a 34.4% return compared to the S&P 500’s return of 23.5%. So far this year, it’s up 0.5% compared with the S&P, which is down 3.7%. [Other Ways to Play the S&P 500 with ETFs.]
Equal-weighting is just as the name implies: each component has the same weight as the next, without regard to size, says Ken Hawkins for Forbes. One point of caution: volatility has a tendency to be higher in the equal-weighted index vs. the S&P 500. This simply reflects the greater weight given to small-caps, which themselves are more volatile.
This ETF is the industry’s first alternatively-weighted fund. RSP touts approximately $2 billion in assets, and the fund has experienced more than 200% asset growth since the beginning of 2009. [How Indexing Affects Your ETF.]
What’s behind the outperformance? RSP has exposure to some of the small-cap companies within the S&P 500, which are believed to be more flexible and nimble during a recovery from a recession. So the smaller-cap companies are weighted just the same as some of the heavyweights, giving equal exposure to companies of all sizes. [Equal Weight vs. Revenue Weight.]
Equal weight is generally said to outperform over time, while a cap-weighted approach tends to do well in specific market conditions.
For more stories about RSP, visit our RSP category.
Tisha Guerrero contributed to this article.
Read the disclaimer; Tom Lydon is a board member of Rydex|SGI.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.