You’re In The Wrong Large Cap ETF

August 27, 2014

Focus On Core Exposure

But what about real, core exposure? After all, most investors are looking to grow their assets slowly over the long term, and a solid large-cap U.S. ETF is the smart place to start. If you go through and remove the idiosyncratic indexes, and all the quasi-active plays, and all the various factor and volatility skewed portfolios, and all of the ETFs that are less than a year old, this is the list I come up with:

Fund Name Symbol Expense Ratio AUM 1 Year 5 Year Spread %
Guggenheim S&P 500 Equal Weight RSP 0.40% $8,554,424,280 22.88% 18.62% 0.02%
SPDR Russell 1000 ONEK 0.20% $51,671,916 22.74% 16.73% 0.19%
Vanguard Mega Cap MGC 0.12% $797,472,000 22.72% 16.36% 0.04%
RevenueShares Large Cap RWL 0.49% $254,124,090 22.69% 16.72% 0.18%
Vanguard S&P 500 VOO 0.05% $21,364,747,800 22.66% -- 0.01%
Vanguard Large-Cap VV 0.09% $5,241,077,520 22.63% 16.83% 0.02%
iShares Russell Top 200 IWL 0.15% $131,515,000 22.62% -- 0.12%
iShares Core S&P 500 IVV 0.07% $60,756,395,000 22.60% 16.59% 0.01%
Schwab U.S. Large-Cap SCHX 0.04% $3,130,051,565 22.60% -- 0.03%
SPDR S&P 500 SPY 0.09% $171,552,111,917 22.52% 16.55% 0.01%
iShares Russell 1000 IWB 0.15% $9,795,871,000 22.52% 16.85% 0.02%
Vanguard Russell 1000 VONE 0.12% $358,566,000 22.52% -- 0.09%
WisdomTree Earnings 500 EPS 0.28% $114,702,753 22.20% 16.41% 0.23%
Guggenheim Russell 1000 Equal Weight EWRI 0.40% $121,320,000 22.17% -- 0.21%
PowerShares FTSE RAFI US 1000 PRF 0.39% $3,799,075,000 21.87% 16.70% 0.03%

There are a few things to note on this list. The first is I’ve included some edge cases that I’m sure my director of research will consider far too smart to be on a “vanilla” list, with the PowerShares FTSE RAFI US 1000 (PRF | A-89) being the most controversial example. PRF is in the class of smart-beta ETFs that selects its securities not just by weight but by fundamental measures like book value, cash flow, sales and dividends.

You’ll note, however, that on a performance basis, and indeed on a portfolio basis, it ends up looking very, very similar to most of the other funds on this list. The same is true for most of the equal-weighted, revenue-weighted and earnings-weighted ETFs here.

The one notable exception is the Guggenheim S&P 500 Equal Weight ETF (RSP | A-79). During the fantastic past five years, it’s outperformed most of these other core equity ETFs by about 2 percent a year, more than earning back its 40 bps expense ratio.

If that sounds too good to be true, consider the not insignificant risks you’ve taken by being in RSP. Instead of an average market cap of around $140 billion (the average in our benchmark for the segment, the MSCI USA Large Cap index), your average market cap has been just $36 billion.

RSP is in fact nearly 40 percent midcaps. It’s also been heavily skewed in the business cycle, with 17 percent in consumer cyclical stocks, versus 12 percent in the broader large-cap market.

All this has given the fund a higher beta to the market than, say SPY. When the market’s going up, that higher beta is great, and it’s paid off. In any downturn, however, you’d expect it to fall faster, and further.


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