Equal-Weight RSP Boxing Out SPY, Mag 7

The sudden strength of RSP reflects a potential market turning point.

Wealth Management Editor
Reviewed by: etf.com Staff
Edited by: James Rubin

While riding a handful of stocks that have been driving market indexes can be exhilarating, there is also a time for tapping the brakes, whether to reduce risk or diversify a portfolio. 

That’s the premise behind ETFs like the Invesco S&P 500 Equal Weight ETF (RSP), which has risen more than 3% over the past month. 

The fact that RSP has been running evenly with the market-capitalization-weighted SPDR S&P 500 ETF Trust (SPY) over the past 30 days has drawn the attention of both savvy market watchers and trigger-happy traders as a sign that the influence of the Magnificent Seven stocks is waning slightly.

“The broadening of market breadth may make financial advisors feel a bit more at ease,” said Nicholas Codola, senior portfolio manager at Omaha, Neb.-based Orion.

“Generally, it’s a sign of a stronger, more resilient market when the majority of the stock market returns are not explained by seven-to-10 names,” he added. “We’ve all heard the old adage that diversification is the only free lunch.”

RSP's Implications for Long-Term Investors

Indexes weighted to the largest and fastest growing companies have historically had a huge upside, as has been evident recently.

Last year, SPY’s 26.2% gain was nearly double the 13.7% gain by RSP. And so far this year that trend has continued with SPY up 8.2% and RSP up 4.5%.

But longer term, where most retail class investors live, RSP has been a powerful force.

Since its inception, 21 years ago, RSP has produced a cumulative return of 542%, which compares to a 458% cumulative return over the same period for SPY, according to Morningstar.

On an annualized basis, according to Invesco, RSP's index, the S&P 500 Equal Weight Index, has generated an 11.5% gain since inception, which compares to a 10.8% annualized return for the S&P 500 Index over the same period.

“Advisors can tell clients that if and when the rest of the 490-plus companies in the index begin to catch up, investors will be more exposed to those gains with an equal weight approach,” said Jeff Schwartz, president of Markov Processes International in Summit, N.J.

“Additionally, equal-weighted indices have an important quirk where the average or mean return of the portfolio is slightly above the median,” he added. “This means that the investor should expect to have a return that is slightly better than half the companies in the portfolio.”

Paul Schatz, president of Heritage Capital in Woodbridge, Conn., sees equal-weight indexes as the start of a longer-term story.

“The Mag Seven has struggled lately and at the same time the New York Stock Exchange advance-decline line has been chugging higher, which is expressed in RSP finally trying to hold its own against SPY,” he said.

Chuck Etzweiler, senior vice president of research at the advisory firm Nepsis in Minneapolis, said equal-weighted and factor-based indexes are part of the nuance that can make indexed investing “quite confusing to even the most intuitive investor.”

“Equally weighted indexes not only provide a greater level of diversification as they lower concentration risk, (but) their methodology allows for a greater number of companies down the market-cap stream to be included, such as mid and small cap companies,” he said. “And anytime an equal-weight process begins to outperform it usually shows a broadening out of companies achieving higher price appreciation and suggests a near term healthy economic environment."

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.