Beat the S&P 500 by Investing in the S&P 500
I saw this article in the January issue of Active Trader Magazine: “Trading a different S&P 500: The RSP vs. the SPY“. The RSP ETF contains the same 500 stocks that make up the S&P 500 but they are equally weighted as opposed to the S&P’s capitalization weighting. The interesting part is that the RSP has been outperforming the S&P 500. Here’s a quote from another article about RSP:
Most investors would agree that just because a company is bigger doesn’t mean that it is a better investment. Let’s look at the most well-known index, the S&P 500, and its well-known ETF, the SPDR. Many investors think that investing in the S&P 500 or the SPY means that their money is being divided equally between 500 companies. This is far from the truth. Because the companies are weighted by size, 22% of your investment is going to the ten largest companies in the index, and 60% of your investment is going to the largest 50 companies in the index.
This is why I have been advising clients to invest in the Rydex S&P 500 (amex: RSP - news - people ) equal-weight ETF, which weights each company in the index equally. In 2003, the equal-weight S&P 500 ETF beat the S&P 500 Index by 11%; in 2004, it beat the index by 5% and year-to-date, it’s ahead of the S&P 500 by 3.4%.
Here’s a two year chart comparing RSP to the S&P 500:
If indexing is your thing you may want to consider using RSP instead of SPY or some S&P mutual fund.
Update: I figured that Roger Nusbaum had written about RSP but I couldn’t find his posts via the Blogger search I did yesterday. Today, after getting his comment, I did a Google search and found several of his posts about RSP.
ETF Investor has some posts about RSP as well.
This post has 3 comments
December 18th, 2005
I have written about RSP a few times in the past and own it for a couple of very small accounts. As you say it works because small usually beats large. It will lag the next time we have a 1997-1999 mega cap lead rally.
Obviously I don’t know when that will be but it will happen again. Great post, Mike.
December 18th, 2005
The main purpose of investing in ETF’s is to match your returns with the market, not to beat the market. SPY is a safeguard in any portfolio. If the market goes down RSP will do worse than the market thus making SPY the safer choice. RSP has a higher turnover 55% compared to SPY 2.23%. This results in a higher expense ratio of 0.4% for RSP compared to a 0.11% for SPY. SPY is a safer investment because they have a higher dividend yield (1.63% v 0.96%) and their performance will match the return of the S&P 500.
December 18th, 2005
PensKL,
I think the purpose of a handful of ETFs is to match the market - namely those ones that mimick an index, QQQQ, SPY, DIA, MDY, etc. But there are over 100 more that are made to allow people to target a specific sector, style, country, region, etc. I think the mere existence of something like RSP invalidates your argument about the purpose of ETFs.
As far as safety, I guess it depends on your definition. To me it’s safer to allocate your money equally among 500 stocks than to be over-weight on some. What happens to SPY & RSP if GE blows up? I think one would be ’safer’ in RSP in that instance.
As for RSP doing worse if the ‘market’ goes down — I think that’s an over-simplification. As Roger said above, which one does better or worse is more a function of how those mega-caps perform relative to the other stocks in the S&P.