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.