SPY is one of the largest and most heavily-traded ETFs in the world, offering exposure to one of the most well-known equity benchmarks. While SPY certainly may have appeal to investors seeking to build a long-term portfolio and include large cap U.S. stocks, this fund has become extremely popular with more active traders as a way to toggle between risky and safe assets. A look at SPY’s daily turnover reveals the short average holding period and the popularity with active traders.
RSP is linked to the S&P 500 Index; however, its unique weighting methodology will make it useful for some, while impractical for active traders. Like many Rydex products, RSP is linked to an equal-weighted index, meaning that component companies receive approximately equal allocations. That results in exposure that is considerably more balanced than other alternatives such as SPY, and a methodology that some investors believe will add value over the long haul. In return for this unique exposure, you can expect higher fees; this ETF is considerably more expensive and less liquid than both SPY and IVV, though it is still extremely cost-efficient compared to most mutual funds.
It has been a great year for plain vanilla, index-based, market cap-weighted ETFs. SPY is up 6.2% YTD, while RSP is down -4.1% YTD. Larger has proven to be better. The U.S. market cap-weighted index plays have outperformed in times of uncertainty. As a result, SPY has 51.7% mega caps, 33.1% large caps, and 12.2% midcaps. RSP has 9.7% mega caps, 37.2% large caps, 51.3% midcaps.
To keep this comparison going, investors look to areas they can rely on, which just so happens to be those stalwart, big names. SPY’s top sectors include information technology at 28%, healthcare at 14%, consumer discretionary at 11%, communication services at 11%, and financials at 10%. Top names include Apple at 6.9%, Microsoft at 5.8%, Amazon at 4.9%, Facebook at 2.3%, Alphabet Class A at 1.7%, and Alphabet Class C at 1.7%.
Basically, technology names have been highflyers for years. Technology names have also stood out as the new consumer staple in a post-coronavirus world. After broad shutdown measures, more people have relied on technology to stay connected.
Meanwhile, RSP’s top sectors include industrials at 15%, information tech at 14%, healthcare at 13%, financials at 13%, and consumer discretionary at 13%. Equal-weight indexing methodology top weights include: L Brands at 0.4%, FedEx at 0.3%, United Parcel at 0.3%, and Advanced Micro Devices at 0.3%. This fund has a lower emphasis on the outperforming tech sector. At the same time, there’s a greater emphasis on the underperforming industrials sector, while the S&P 500 Industrial Sector is -5.4% YTD.
Will larger always be better?
Mid-caps could outperform over a longer investment horizon. Middle-capitalization stocks combine the growth potential of younger companies with financial stability often associated with larger companies to provide investors with the best of two worlds. This asset category reflected a higher conviction part of the global equity markets with greater catch-up potential after the coronavirus blow to markets.
Supported by earnings growth, mid-caps have generated consistent outperformance over rolling periods relative to large and small caps. When looking at historical data from January 1996 through June 2020, mid-caps generated 6.36% earnings growth, compared to the 5.24% for large-caps and 0.88% for small-caps. Looking ahead, mid-cap stocks could offer a more attractive post-recession opportunity. Smaller sized companies typically do better in a recovery economic business cycle.
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