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.

Comments

  1. Posted by Roger Nusbaum on December 18, 2005 at 9:29 am

    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.

  2. Posted by PensKL on December 18, 2005 at 6:06 pm

    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.

  3. Posted by Michael on December 18, 2005 at 7:26 pm

    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.