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RSP versus SPY

Although both are S&P 500 Index ETFs, there are distinct differences between RSP and SPY. RSP is an Exchange Traded Fund issued by Invesco fund. SPY is an ETF from State Street Global Advisors Trust Company


Another significant difference between the two ETFs is that RSP is an equal weight index. SPY is a market capitalization weight index.

The two popular ETFs hold the same number of S&P 500 stocks of around 500 names. Because of different calculations, their allocations and performances can differ dramatically.


Several mega-cap S&P 500 stocks in the technology sector greatly influence SPY. For instance, the top 10 stocks in SP represent more than 27.37% of the total assets.


In contrast, each stock in the RSP’s holdings is 0.2% of its total assets or 1/500 of the overall total. The top 10 holdings account for only 2.36% of the index.

The enclosed chart shows RSP outperforming SPY since the 3/23/20 market bottom. RSP's return is 110.06% versus SPY’s return of 91.21%. Also, RSP’s current dividend yield is higher than SPX's or 1.62% versus 1.46%.

The second chart shows a ratio analysis of the RSP/SPY over the past 5-years. A technical base continues via a cup and handle or a head/shoulders bottom pattern.


A convincing move above 0.36123-0.3622 confirms a breakout and signals the start of an intermediate-term outperformance cycle in RSP relative to SPY.


The 50-day ma (0.3547) and the 200-day ma (0.3511) have contracted, and an impending test of the two moving averages can decide the relative outperformance cycle between the two ETFs.

RSP, with its equal-weighted index, continues to outperform SPY this year. The fund benefits from the diversification strategy of having each stock weighted equally. The sell-off in the large-cap technology sector also favors the equal-weighted RSP ETF.

Although the current market condition differs from the start of the year when mega-cap technology growth names traded at extreme multiples and high valuations, RSP remains a compelling story today. It is a good option for investors fearful of ongoing geopolitical, macro-economic, uncertain Fed monetary policies, and overall market headwinds.

RSP offers a core holding position of diversified large-cap names as the 2022 cyclical bear decline enters its seasonal weakness period from September to October.


Also, leading up to the mid-term elections in November, financial markets may become increasingly volatile.


The Invesco S&P 500 Equal Weight ETF offers investors an opportunity to invest in the large-cap S&P 500 Index on an equal-weighted basis.


Compared to other SPX index funds such as SPY and Vanguard S&P 500 ETF (VOO), an equal weight indexing such as RSP helps an investor to diversify and avoid concentration risks.


The caveat to this call is if the mega-cap technology stocks such as the FAANG names return to leadership roles, this can lead to SPY and VOO outperforming their equal-weight RSP counterpart.


Another interesting point, RSP is one of the best-known equal-weighted ETFs, and the way RSP weights all the stocks in the S&P 500 Index equally shifts the footprint toward the smaller to mid-size S&P 500 stocks, which can also lead to a higher beta for the portfolio.

If you have the mindset of a very long-term investor, this may not matter, as SPY is a classic vehicle for buy-and-hold investors. Over the long term, the S&P 500 has produced an average annualized return of 10% since 1928, including dividends.


However, a tactical investor may wish to consider RSP as an alternative investment approach to diversifying an equity portfolio.



Source: Charts courtesy of StockCharts.com

Source: Charts courtesy of StockCharts.com

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