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.
EQL “takes a distinct approach to equal weighting the S&P 500 Index. EQL holds the nine Select Sector SPDRs, covering the 10 sectors of the S&P 500 index (telecom services is part of the technology ETF). While it also rebalances every three months like RSP, the sector exposure it provides is different than it is for RSP and for IVV,” according to S&P Capital IQ. [All Sectors the Equal-Weight Way]
In addition, EQL received an Overall 4 Star Morningstar Rating as of February 28, 2015 against 34 of U.S. ETF Large Blend Funds based on risk adjusted returns, according to a statement issued by ALPS. EQL applies equal weighting to the nine sector SPDR ETFs from State Street Global Advisors.
EQL is up 60% over the past three years.
Guggenheim S&P 500 Equal Weight ETF
Tom Lydon’s clients own shares of RSP, SPY and IVV.