The Guggenheim S'P 500 Equal Weight ETF (RSP) turns 10 this week, and its birthday celebration can’t be complete without pointing out the remarkable fact that, since its launch, it has returned about 87 percent more than its market-capitalization-weighted competitor, the SPDR S'P 500 ETF (SPY).
Indeed, since RSP first launched April 24, 2003, it has rallied about 129 percent, compared with a 70 percent gain for SPY in the same 10-year period. That’s 59 percentage points of outperformance in a fund that’s been around half as long as SPY.
RSP was one of the pioneers in a segment of the ETF market that in many ways started with the launch of the S'P 500 Equal Weighted Index in January 2003. The broader context is that equal weighting really gathered traction in the aftermath of the dot-com bust in the early 2000s that left many investors with hefty exposure to large-caps in the space—Cisco Systems being the poster child—in a bad place.
As those big names collapsed, market-cap-weighted strategies heavily allocated to those firms felt the burn, fostering a new era in investing that looked outside of the prevalent market-capitalization box for alternative ways to gain exposure to the U.S. stock market.
Firms like Rob Arnott’s Research Affiliates and publicly traded ETF sponsor WisdomTree, to name a few, have built entire product lines on the premise of alternative weighting methodologies that look to avoid what became known in the aftermath of the Internet bust as the “Cisco effect.”
Outperformance's 'Idiot Savant'
“RSP is an interesting fund,” Matt Hougan, EVP and global head of content at IndexUniverse, said. “It’s the idiot savant of outperformance—you take the stocks in the S'P 500, you weight them equally and you rebalance.”
“It’s translated into huge outperformance over the years, and you can say that’s because of the tilt toward small and midcaps, which is true,” he added. “But still, it’s true, and that’s served advisors well.”
RSP—which now boasts a relatively modest $3.2 billion in assets compared with SPY’s $125 billion footprint—is one of roughly 60 equal-weighted U.S. equities ETFs available to investors today.
The strategy assigns equal weights to the constituents of the S'P 500, the same index benchmarking SPY and, as is often the case with equal-weighted strategies, RSP has a tilt toward smaller-cap names simply because it cuts the weighting of the larger companies that are so prominent in market-capitalization indexing methodologies.
That tilt is known for delivering outperformance in bull markets, but is also known for underperforming the broad stock market when things go south.
Another complaint with equal-weighted portfolios is that they often require more frequent rebalancing as they strive to keep securities equally balanced, which means investors incur more transaction costs and taxes with a fund like RSP than with a market-cap-weighted strategy like SPY. Still, such costs aren’t necessarily a “serious hurdle in practice,” according to S'P Dow Jones. And as Guggenheim pointed out, RSP has never distributed a capital gain.
“Equal weighting is factor indifferent,” a note from S'P Dow Jones Indices said today. “Because it randomizes factor mispricing, it is an attractive option for proponents of the theory that the market is inefficient and, at times, misprices factors.”
By design, equal-weighted portfolios assign weights to securities regardless of their projected returns, and can show lower individual stock risk and “slower-changing sector exposures,” the S'P note said.
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