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.”