Here’s An ETF First: SPY Beating RSP

Cap-weighted fund finally beating its equal-weighted counterpart in performance.

For the first time in more than a decade since it came to market, the Guggenheim S&P 500 Equal Weight ETF (RSP | A-79) is set to underperform the SPDR S&P 500 (SPY | A-98) this year.

In its first 10 years, RSP—launched in 2003—delivered nearly twice SPY’s returns, rallying 130% compared with a 70% gain for SPY in the same period. Last year, RSP still outperformed SPY’s total returns, with a tiny edge of less than 1 percentage point.

The historical outsized gains have been tied to the fund’s equal-weighting methodology, which eliminated heavy concentration on a few large-cap names, and it offered a smaller-cap tilt to the portfolio relative to SPY.

But in 2015, RSP is a clear underperformer, as the chart below shows:

Pioneer Of Equal Weighting

The fund’s history is an interesting one. RSP was one of the pioneers in a segment of the ETF market that in many ways started with the launch of the S&P 500 Equal Weighted Index in January 2003. It could even be said the fund is one of the original “smart beta” strategies.

The immediate appeal of RSP, which today has nearly $10 billion in assets, originally stemmed from the aftermath of the dot-com bust in the early 2000s that left many investors with hefty exposure to large-caps in a bad place.

Cisco Systems was the poster child of the single large stock risk in a market-cap portfolio—after the so-called Cisco effect, equal weighting the S&P 500 just sounded like a good idea.

Diversification Benefits

To money managers like Matthew Tuttle, CEO of Tuttle Asset Management, that idea is still attractive, because equal weighting provides diversification. As he put it, in RSP, “Every stock in the index has an equal impact. In the S&P 500, the 500th stock barely matters.”

But in 2015, when the stock market barely delivered any gains—and those gains were driven by a handful of large securities—equal weighting hasn’t quite paid off. Small-cap stocks underperformed large-cap—the Russell 2000 slid more than 5% in 2015, while the S&P 500 is practically flat—and value names significantly underperformed growth.

Long-Term Benefits Of RSP

“Long term, RSP has some advantages over SPY—the equal weighting means it has less exposure to a handful of stocks, more exposure to small-caps, and more exposure to value stocks,” said Tuttle, who manages more than $200 million in assets. “All of those things have been the wrong places to be this year, hence the underperformance. Long term, I think RSP is still better than SPY, but this year, not so much.”

To that point, in the aggregate, investors who bought into RSP at inception in 2003 would have captured roughly 42 percentage points in outperformance relative to SPY 12 or so years later, as the chart below shows:

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected].