Long-term investors who are less wary of short-term twists and turns should look to an equal-weight S&P 500 exchange traded fund that focuses on smaller companies in the benchmark index as a way to generate enhanced returns over the long haul.
Specifically, the the Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), which tracks the S&P 500 Equal Weight Index, just recently celebrated its 14th anniversary after launching on April 24, 2003, and over the past 14 year period, RSP has outperformed the benchmark S&P 500.
Since the fund’s inception, RSP has generated an average annualized return of 11.17%, compared to the S&P 500 Index’s 9.3% return. Over the past decade, the equal-weight S&P 500 ETF has generated an average annualized return of 8.1%, whereas the S&P 500 returned an average 7.5%.
“Over the trailing 10 years through January 2017, the fund has trounced the large-cap blend category by 1.5 percentage points annually, easily placing its performance in top decile,” Morningstar analysts Adam McCullough said in a research note.
The outperformance may be attributed to its equal-weight indexing methodology. RSP is considered one of the industry’s first and oldest smart or strategic-beta ETFs as the fund eschews traditional market capitalization weighting schemes in favor of a very simple alternative by equally weighting each of its components, ensuring that the smaller names within the S&P 500 were weighted as heavily as their larger peers.
For example, among RSP’s top holdings, Vertex Pharmaceuticals (NasdaqGS: VRTX) is the largest portfolio holding at 0.25%, followed by Whole Foods Market (NYSE: WFM) 0.25%, FMC Corp (NYSE: FMC) 0.24%, C.R. Bard (NYSE: BCR) 0.24% and Lam Research Corp (NasdaqGS: LRCX) 0.2%. In contrast, the S&P 500’s largest picks include prominent names like Apple (NasdaqGS: AAPL), Microsoft (NasdaqGS: MSFT) and Amazon (NasdaqGS: AMZN).
“Although it holds the same stocks as the S&P 500, equal weighting can significantly change the fund’s characteristics,” McCullough said. “Compared with the index, the smallest stocks have overweightings and the largest have underweightings, creating a mid-cap equity performance contour.”
Due to its weighting methodology, RSP leans toward a mid-cap focus, including a market cap breakdown of 48.4% mid-caps, 39.9% large-caps and 11.3% mega-caps. On the other hand, the S&P 500 holds 50.0% mega-caps, 36.6% large-caps and 13.4% mid-caps.
Additionally, when the equal-weight ETF rebalances each quarter, the fund reduces stock exposure to those that have outperformed, which typically grow in size, and increases positions to names that have underperformed, which have likely gotten cheaper.
Sector weights are also driven by the number of companies in each sector rather than their market value, so RSP favors consumer discretionary, real estate and utilities sectors, but the equal-weight ETF underweights areas like tech, healthcare and financials when compared to the market cap-weighted S&P 500.
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.