As the equities markets rally off the February lows, small-cap stock exchange traded funds have sprinted ahead of their larger counterparts.
Due to its equal-weight indexing methodology, RSP includes a hefty 46.3% tilt toward mid-caps, along with 40.1% large-caps and 11.0% mega-caps. In contrast, SPY’s market cap-weighted methodology leans toward 49.9% mega-caps, 36.7% large-caps and 13.2% mid-caps.
“While this fund has had stellar performance when compared against the large-blend Morningstar Category, the bulk of its excess returns can be attributed to its mid-cap tilt,” according to Morningstar analyst Michael Rawson. “Its approach of trading against the market at index rebalance dates may also help boost returns, but this effect is small in relation to the fund’s bet on mid-cap stocks.”
RSP’s equal-weight index treats all companies the same in terms of how they influence the market, report Nicholas Wells and Eric Chemi for CNBC.
For instance, Michael Kors (NYSE: KORS) is RSP’s largest component at 0.3% of the ETF’s weight. Consequently, the ETF is less susceptible to large swings in any particular company. On the other hand, as a cap-weighted index ETF, SPY includes a heftier 3.2% in Apple (NasdaqGS: AAPL).