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Why Equal Weight ETFs Outperform Traditional Benchmarks


An equal-weight index exchange traded fund has consistently outperformed the broader S&P 500, capitalizing on smaller company exposure in the equal weighting methodology.

The Guggenheim S&P 500 Equal-Weight ETF (RSP) has generated an average annualized return of 9.5% over the past 10 years, whereas the SPDR S&P 500 ETF (SPY) gained an annualized 7.4%. Year-to-date, RSP is up 28.0% while SPY increased 24.3%. [What an Equal-Weight S&P 500 ETF Brings to the Table]

The equal weight methodology, like the name suggests, equally weights underlying holdings so that each company has an equal affect on the overall performance of the portfolio. In contrast, the market-capitalization weighted S&P 500 index will lean toward large, well-established names.

For instance, looking at the allocations in market capitalization, SPY holds 51.1% in mega-caps, 37.2% in large-caps and 11.7% in mid-caps. In contrast, RSP allocations include mega-caps 12.0%, large-caps 43.9% and mid-caps 43.7%.

However, considering the emphasis on smaller companies in RSP, Gary Gordon on ETF Expert believes that the equal-weight ETF captures what a traditional market-cap weighted index for smaller companies might reflect. Specifically, the iShares Russell 200o ETF (IWM) has gained an average annualized 9.2% in the past 10 years compared to RSP’s 9.5% return.

Nevertheless, equal-weight enthusiasts can still consider the Guggenheim Russell 2000 Equal Weight ETF (EWRS) , which places a heavier tilt toward micro-cap stocks. EWRS, though, is relatively new and does not have a long-term track record like the other funds.

IWM allocates 9.6% to mid-caps, 60.6% to small-caps and 29.8% to micro-caps, compared to EWRS’s mid-cap 3.4%, small-cap 35.6% and micro-cap 61%. [Small-Caps Getting Pricey]

“Indeed, investors who may eschew liquidity and volatility in favor of enhanced upside potential could usually garner more upside through equal weighting; one could choose funds like Guggenheim (Rydex) Equal Weight Technology (RYT) over SPDR Select Technology (XLK) and/or Guggenheim (Rydex) Equal Weight Materials (RTM) as opposed to SPDR Select Sector Materials (XLB) ,” Gordon noted.

For more information on equal-weight funds, visit our equal-weight ETFs category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own RSP, SPY and IWM.

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.