Following a slump for U.S. stocks in September and a meager third-quarter return of just a third of a percent for the S&P 500, some investors may be leery of equities heading into October, a historically volatile month. However, it is worth remembering that 2014 is a mid-term election year, a catalyst that often serves stocks well in October.
“Historically during mid-term election years, the S&P 500 Index has its strongest monthly performance during October, rising on average 3.0% since World War II. Of course, past performance is not indicative of future results. Looking forward on a 12-month basis, S&P Capital IQ has Strong Buy or Buy recommendations on 182 of the S&P 500 Index constituents,” said S&P Capital IQ in a new research note. https://www.capitaliq.com/home.aspx
Also worth noting is that October can be an opportune time in which to embrace cyclical and higher beta sectors, such as consumer discretionary and technology, particularly later in the month. The Technology Select Sector SPDR (NYSEArca: XLK) and the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) are historically the top two sector SPDR ETFs in October.
Combine that with some pre-election ebullience, and the time could be right for investors to revisit the popular Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP).
“Unlike the SPDR S&P 500 ETF (NYSEArca: SPY), that tracks the market-cap weighted S&P 500 Index, Guggenheim’s RSP takes an equal-weighted approach to following the well-known benchmark. As such, though the names inside RSP will match SPY, the security weightings and the sector weightings will be quite different,” according to S&P Capital IQ.
RSP’s largest sector weight is 16.8% to financial services, a group that is second-largest in the cap-weighted S&P. The Guggenheim offering is also overweight consumer discretionary with an allocation of 16.4%, which could prove useful if holiday shopping momentum picks up for that sector in late October as expected. [Retail ETFs Ready for Holiday Shopping]
“RSP is rebalanced on a quarterly basis, essentially trimming leading positions and adding to lagging positions. At 37%, such turnover is much higher than SPY’s 3% that holds larger stakes in better performers and only experiences turnover when a security is added/removed from the index. Such rebalancing also likely contributes to RSP’s higher 0.40% expense ratio,” said S&P Capital IQ.
The research firm has overweight ratings on both RSP and SPY.
To the naked eye, much of RSP’s lengthy performance advantage over cap-weighted S&P 500 ETFs is attributable to heftier allocations to small-caps and lower weights to mega-caps. In reality, rebalancing helps drive RSP’s performance advantage. Efficient rebalancing of equal-weight ETFs, either sector or broad market funds, not only drives returns, but also helps these ETFs steer clear of concentration risk. [Strategic Applications of Equal-Weight ETFs]
“RSP trades on average more than 800,000 shares on a daily basis and in our view has positive technical trends, above its 200-day moving average. The ETF trades with a tight $0.02 bid/ask spread. Year to date through September 29, RSP has risen 8.2%, modestly lagging SPY’s 8.5%. However, in 2012 and 2013, RSP outperformed by 117 and 322 basis points, respectively. Not surprisingly since RSP has smaller stakes in the less volatile mega-cap companies, RSP’s three-year standard deviation of 13.1 is higher than SPY’s 11.4,” according to S&P Capital IQ.
Guggenheim also features a lineup of nine equal-weight sector ETFs along with three equal-weight options for major benchmarks such as the Russell 2000 Index as well as the Guggenheim MSCI Emerging Markets Equal Weight ETF (NYSEArca: EWEM).
Guggenheim S&P 500 Equal Weight ETF
Tom Lydon’s clients own shares of RSP and SPY.