IndexUniverse reached out to Guggenheim’s Head of Product Development Bill Belden on the 10 th anniversary of RSP, its equal-weighted S'P 500 ETF . The fund has outperformed cap-weighted S'P 500 funds such as the SPDR S'P 500 (SPY) by almost 90 percent since its launch, and Belden sees little reason it won’t do it again in the next decade.
He also takes issue with those who say the Guggenheim S'P 500 Equal Weight ETF (RSP) really ought to be compared to midcap portfolios like State Street’s SPDR S'P Mid-Cap 400 ETF (MDY) or Vanguard’s Mid-Cap ETF (VO). Those funds have totally different stocks than RSP even if RSP’s market capitalization skews toward the midcap range of securities.
Overall, Belden told IndexUniverse.com Correspondent Cinthia Murphy that Guggenheim is well pleased with RSP, its first ETF, and noted that all of Guggenheim is also celebrating its 10 th birthday this year.
IU.com:Why has equal-weighting the S'P 500 done so well relative to market-cap weighting that portfolio of stocks in the past decade?
Belden :Well, that gets right to the heart of the matter:When you look back at the performance history, you look for the attribution for that performance; it brings us back to the positioning we provide for RSP. It’s as much an analysis or a critique of the weakness in market-cap weighting as it is an endorsement of equal cap weighting, to be quite honest. But what equal weighting does is provide a discipline to capturing equities market exposure—in this case, large-cap equities exposure—without having an allocation become overly concentrated on a few names.
For the bulk of 2012, as everyone rode the Apple train higher, market-cap weighting was delivering some outperformance, and no sooner did Apple fall than equal weighting started to ring true once again. Having an exposure that’s spread out across a basket of stocks provides a more meaningful upside opportunity—even on a risk-adjusted basis relative to a market-cap-weighted strategy.
IU:Some say that, over time, market-cap weighting should still deliver bigger returns, especially when taking into account the expenses involved with equal weighting. Are the last 10 years representative of what equal weighting can do, or were they an exception?
Belden :I think 10 years is a very indicative history of what expectations can be over time. Obviously, we can’t get into predicting performance, but it provides a very realistic snapshot of performance on a number of different market environments that we found ourselves in.
It’s been quite an interesting 10-year period for equities. We’ve not only had a couple of years of weak performance—which provides windows into equal-weighting performance relative to market cap in those times—big names don’t move as dramatically or severely during times of market volatility. Therefore, you would think market cap would outperform dramatically, but RSP underperformed S'P 500 two times.
In each of those cases, it was by around 2.5 percent—one of those times it was in 2008, when the S'P 500 was down 37 percent and we were down a little over 40 percent. And while RSP has provided real returns for 10 years, we have backtesting that goes beyond that and demonstrate that it can deliver value in different market environments.
IU.com:Does equal weighting change the factor exposures of the portfolio, and is that what really drives the outperformance relative to market-capitalization focus?
Belden :From a factor perspective, to quote S'P, equal weighting is factor indifferent, and part of the beauty of the strategy is its simplicity—equal weighting does not take into account real factors that influence its composition other than distinction in the way it weights relative to market cap.
As a byproduct of that simple approach, you really do deliver a factor-indifferent strategy, but if you look at the composition of the portfolios side by side, you are going to have more value orientation to RSP than you would to a market-cap-weighted portfolio just because one of the primary contributors to market-cap weighting is the fact that prices go higher and weighting correspondingly goes higher—higher prices typically correspond to a more growth-characteristic profile in a market-cap allocation.
Keep in mind that the equal-weighting approach that rebalances on a quarterly basis takes the names that have rallied in price over preceding quarters and redistributed that growth across those names that have not performed so well in that time, so it leads to a more value-oriented profile.
To talk about market cap itself—RSP obviously has a smaller capitalization profile than the market-cap-weighted indexes, but we own exact the same names. The S'P 500 comprises the 500 largest U.S. companies by market capitalization in domestic equity universe here, and we own the same names in different proportions. We don’t own midcap or small-cap names. We own large-cap names, so comments about market capitalization are off the mark—the fund is still fully allocated to large-cap.
IU.com:Some say comparing RSP to SPY isn’t fair, but should investors compare to MDY or VO?
Belden :When you look at the actual composition of the portfolio itself, the market capitalization is perhaps closer to the average market cap of a midcap portfolio than it is to the S'P 500, because there’s so much concentration on the top end of the scale there—nearly 20 percent of the S'P 500 is in the top 10 names, and over 30 percent is in top 20 names. That means 460 names have 70 percent of that.
The capitalization of RSP as the overall snapshot of that universe puts it in a territory where it’s more analogous to an MDY composition, but the names are completely different. There’s no overlap—RSP is all large-cap names. The smallest name in SPY and RSP is a $2 billion stock.
It’s important to note that you can make the comparison that it has higher weighting to smaller-cap names, but certainly not to small-cap names.
IU.com:Is there a market environment when opting for equal weighting does not make sense? What are some of the pitfalls with equal weighting?
Belden :I think that during periods when mega-cap names are outperforming—the biggest of the big—you will typically see RSP underperform. If you look at the periods of time when the S'P 500, on a day-to-day performance basis, has been up, RSP outperforms the index 70 percent of the time.
That has been the case over the past three years, over the past one year, and year-to-date, RSP has outperformed about 2/3 of the time in those instances. When the market is up, RSP is more likely to outperform. And when the market is in a consistent downdraft, RSP is more likely to underperform. But in the past 10 years, the underperformance hasn’t been that dramatic in those.
IU.com:As far as the cost structure, is the cost difference for an equal-weighted strategy really negligible in practice, as S'P suggested?
Belden :I think so. We look at cost as something that is quite relevant, especially in the absence of value, and the price of RSP is perhaps mostly considered after you look at the relative performance over a cheaper alternative like SPY. I don’t think anyone who has owned RSP in the past 10 years, if given the option, would choose to return the performance in exchange for the fees paid. There’d be no takers.
I will say that, in light of the fee wars that we’ve heard and talked so much about among beta exposures, we really feel that RSP’s value being delivered justifies the expense that we charge for it, especially as one of the first and leading alternative weighting methodologies out there today.
IU.com:What do you hear from advisors? Any interesting insight on how they are using RSP?
Belden :We are actually seeing evidence that when S'P 500 hits certain technical levels that point to a run or a bullish period for expected returns, we see greater adoption. This year we’ve seen a couple of significant allocations that are a byproduct of technical trades being hit last year, and that’s evidence that when the market is going up, RSP outperforms, and advisors are looking to capture that alpha.
So, we are certainly seeing that—it’s a technically driven rather than fundamentally driven event, but that’s predicated on the expectation that the market is going to outperform.
In that context, RSP is an alpha generator—it’s more something that’s done on a tactical basis. RSP can be your ongoing core holding, but allow for alpha-generating beyond core exposure. And with that comes the expectation that when the technical levels are hit, these investors are moving out of the market. And some do, others don’t—it depends on the model that’s been employed by the advisor.
IU.com:Great. Congratulations on this milestone.
Belden :We’re very pleased. It’s not only RSP’s, but it’s also our overall 10-year birthday in the ETF market as an ETF sponsor—RSP was our first ETF. We’ve been looking forward to this 10-year mark on the heels of SPY’s 20 th anniversary earlier this year.
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