RSP: Guggenheim S&P 500 Equal Weight ETF
Smart-beta ETFs are currently all the rage, but they're not exactly a new concept. The Guggenheim S&P 500 Equal Weight ETF (RSP | A-83), which launched in 2003, was actually the first fund to entirely eschew weighting by market capitalization. And RSP's fairly consistent outperformance compared with its cap-weighted brethren (SPY and IVV) is likely part of the impetus behind the widespread popularity of alternatively weighted ETFs that we see today.
According to Bill Belden, managing director of Guggenheim Investments, the origins for RSP actually date back to the early 1970s, when an equal-weighted S&P 500 portfolio was first managed for an institutional investor as a separately managed account. But along with a general lowering of commission fees, it really was the ETF wrapper that made an equal-weighted portfolio practical for many.
The strategy came with significant transactional costs and tax consequences when packaged as a separately managed account or a mutual fund that diluted its outperformance relative to a cap-weighted S&P 500 strategy. Belden says that the ETF wrapper, with its in-kind transaction mechanism, offered both transactional and tax advantages.
"It's an efficient delivery of an impressive performance story," he explained, noting that a common criticism of smart-beta approaches is that their execution requires a higher number of transactions. The implication seems to be that the current smart-beta phenomenon wouldn't be possible without ETFs.
But it's that performance that's arguably the most interesting part of RSP's rise. A look at a graph comparing its history to that of SPY shows an ever-widening performance gap.
While Belden attributes some of RSP's outperformance to severing the link between a stock's price and its index weight, he believes the regular rebalancing has been a bigger factor, because it means the portfolio is regularly buying stocks after they've fallen in price, and selling them after they've risen in price.
"The rebalancing schedule—which happens on a quarterly basis—has really helped drive what value has been delivered through RSP over its 12-plus years of history," Belden noted.
To Guggenheim, RSP is a core large-cap holding for client portfolios, even if it's riskier than market-weighted vehicles. The added risk of higher volatility associated with an equal-weight strategy has been rewarded by the outperformance, which tends to be greater in rising markets, Belden says.