An exchange traded fund that has seen abnormal action this week is Rydex S&P 500 Equal Weight (NYSEArca: RSP). More than 10 million shares have traded in the past three sessions (with average daily volume in the ETF totaling 1.63 million shares) and the fund has taken in nearly $300 million in new assets, which is more than 10% of the current assets of the fund.
RSP is the S&P 500 index name for name, however the portfolio is equally weighted across its components and rebalanced on a quarterly basis so as to keep the weightings in line over time.
RSP differs from other S&P 500 based funds such as SPDR S&P 500 (NYSEArca: SPY) and iShares S&P 500 (NYSEArca: IVV) in that those ETFs follow a market capitalization weighted methodology in owning the S&P 500, which is calculated by taking the shares outstanding of a given holding and multiplying it by that holding’s price per share.
Thus, the stocks with the highest market caps are given higher weightings, and have a larger representation in the overall index.
Critics of “market cap” weighted ETFs point to the fact that the indexes are “reactive” and not “proactive” in that they do not naturally rebalance and the weightings can become skewed to sectors or individual names that may in fact be
“overvalued” from a price per share standpoint.