Not All S&P 500 ETFs are the Same

The S&P 500 is the most widely followed equity benchmark in the world. As of early June, the S&P 500 had $7.8 trillion following it with $2.16 trillion of that coming by way of exchange traded funds, mutual funds and other investment products, according to S&P Dow Jones Indices.

Of the seven largest U.S.-listed ETFs, including the two largest, three are S&P 500 tracking funds. That trio is comprised of the SPDR S&P 500 ETF (NYSEArca: SPY), the world’s largest ETF; the iShares Core S&P 500 ETF (NYSEArca: IVV) and the Vanguard 500 Index (NYSEArca: VOO). While these ETFs and other S&P 500 offshoots sound like they are carbon copies of each others, investors need to discover slight though important differences between various S&P 500 funds. [$7.8 Trillion Benchmarked to S&P 500]

The $11.1 billion Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP) is one of the most popular alternative S&P 500 ETFs. RSP “holds the same 500 companies as IVV, but due to its equal-weighting approach and quarterly rebalance, the sector exposure is quite different than the market-cap weighted IVV. With the stakes of each company of equal size, Apple (NasdaqGS: AAPL) and Alleghany Technologies (NYSE: ATI) have the same impact on RSP’s returns, despite the $700 billion difference in their market capitalizations,” said S&P Capital IQ in a new research note.

RSP has generated an average annualized return of 9.4% over the past 10-years, whereas the market-cap-weighted S&P 500 Index has returned an average 8%.

While equal-weight ETFs have been more than legitimized over the years, some critics allege that the advantages of these products are solely tied to deeper exposure to small-caps and/or value stocks. However, three is an on an oft-overlooked driver of returns to equal-weight ETFs: Rebalancing. 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. [How to Evaluate ETFs]

The ALPS Equal Sector Weight (NYSEArca: EQL), home to $141 million in assets under management, is another well-known alternative to traditional S&P 500 ETFs.