As the equities markets rally off the February lows, small-cap stock exchange traded funds have sprinted ahead of their larger counterparts.
Since the February 11 lows, the SPDR S&P 500 ETF (NYSEarca: SPY) gained 9.0% while the Guggenheim Equal S&P Weight ETF (NYSEarca: RSP) increased 9.1%.
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).
Looking at the S&P 500 components by market value, smaller companies have helped contribute to RSP’s outperformance. About 132 companies with a market value of less than $10 billion have surged 14.2% since the February lows. In comparison, the 41 companies with a market value of over $100 billion showed a 7.1% return since the lows.
The equal-weight methodology also changes up RSP’s sector weights relative to the S&P 500. RSP top sectors includes 17.0% financials, 16.8% consumer discretionary and 13.3% industrials while SPY holds 20.5% tech, 15.8% financials and 14.7% health care.
Additionally, looking at ETFs that target the smaller asset categories, the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks small-cap stocks taken from the Russell 2000, advanced 10.7% and the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH), which includes mid-cap stocks taken from the S&P MidCap Index, rose 9.6% since the February low.
Guggenheim Equal S&P Weight ETF
Max Chen contributed to this article.