Many turn to the S&P 500 to gain core market investment exposure, but an exchange traded fund that tracks an equal-weight S&P 500 indexing methodology may be a better bet.
At the year end of 2016, the S&P 500 Equal Weight Index generated alpha or outperformance of 284 basis points compared to the traditional cap-weighted S&P 500 Index.
The equal-weight index has also performed over the long haul, with the S&P 500 Equal Weight Index outpacing the benchmark S&P 500 index 10 of the last 14 years. The S&P 500 Equal Weight Index has also produced higher 3-, 5- and 10-year returns.
The outperformance is also reflected by the Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), which tracks the S&P 500 Equal Weight Index. Over the past year, RSP rose 32.4% while the S&P 500 Index gained 28.7%. RSP also generated an average 7.9% annualized return for the past 10 years, compared to the S&P 500’s 7.2% average return.
“The S&P 500 Equal Weight Index is the equal weight version of the S&P 500 Index,” according to Index Funds. “It contains the same constituents as the cap-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated the same weight at each quarterly rebalance. Therefore, the holdings are balanced across all of the S&P 500 companies evenly over time. Whereas, the cap-weighted S&P 500 Index over-weights the 50 largest companies with close to 50% of the holdings.”
For instance, RSP’s largest component holding is NRG Energy (NYSE: NRG) at close to 0.3% of the fund’s portfolio.
In contrast, as a traditional cap-weighted index, the S&P 500 holds a 3.6% position in Apple (NasdaqGS: AAPL), followed by Microsoft (NasdaqGS: MSFT) 2.5% and Exxon Mobil (NasdaqGS: XOM) 1.7%. NRG also makes up about 0.3% of the S&P 500’s underlying portfolio.
Due to its equal-weight methodology, the S&P 500 Equal-Weight Index and RSP’s portfolio tilt toward more mid-sized companies. RSP includes a large 46.4% tilt toward mid-caps, followed by 40.9% large-caps and 11.8% mega-caps. In contrast, the S&P 500 includes 50.2% mega-caps, 36.8% large-caps and 13.0% mid-caps.
Moreover, due to the varying indexing methodologies, RSP is overweight consumer discretionary at 15.7% of the ETF’s portfolio and industrials at 13.8%. Meanwhile, the S&P 500 Index heavily favors information technology at 21.5%.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.