The argument for equal weighting a portfolio of stocks is growing stronger.
RSP has delivered a 10.36% average annual total return against the S&P 500's 7.71% average annual total return (through April 22, 2013).
Each stock within RSP is assigned a portfolio weighting of 0.20%. That means even the S&P 500's tiniest stock, Advanced Micro Devices (AMD - News), gets the same amount of exposure as its largest (Exxon Mobil) despite that AMD is 197 times smaller by market size.
In contrast, the S&P 500 is a market cap weighted index, meaning each stock is weighted by its market cap or size. The S&P's top two holdings alone, Exxon Mobil (XOM - News) and Apple account for around 5.5% of the index. (Watch: What you need to know about ETP structures)
RSP is rebalanced every quarter to maintain its equal weighting strategy.
Should investors stick with trading market cap weighted index funds and ETFs or switch to equal weighted ones?
"After fees on risk/adjusted basis, you're better off using the S&P 500. There's cheaper ways to get midcap exposure than paying 0.40%," says Rick Ferri founder of Portfolio Solutions.
Ferri also points out that the S&P 500 EWI underperformed the cap-weighted S&P 500 by about 3.1% annually from 1990 to 1999.
RSP charges annual expenses of 0.40% and was launched on April 24, 2003.
Guggenheim currently manages 14 equity ETFs that use an equal weight strategy. The lineup of funds includes stocks linked to emerging markets (EWEM - News), the small cap market (EWRS - News), and specific industry sectors (RYH - News).
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