The SPX market-weight ETF (SPY) and the SPX equal-weight ETF (RSP) track the same index (SPX). Although both consist of the same SPX companies, they can trade differently.
The difference between SPY and RSP is the former is influenced heavily by the most significant market cap components (i.e., mega-cap S&P 500 technology names). While the latter are equal in weight and have a similar impact.
As the name implies, every stock in an equal-weighted ETF has the same weight, regardless of the size. The most influential component of the SPX by market cap (APPL) has the same weight as the smallest.
Since the smaller S&P 500 companies have the same influence on the index as larger-cap companies, it creates a more equitable, balanced, and diversified portfolio.
The equal-weight index can reduce concentration risks by spreading the risks evenly across the index, allowing investors to have representation of a wide selection of businesses in numerous sectors and industries.
An equal-weight index can offer investors more protection if a large sector (i.e., technology) suffers a significant downturn, as the smaller sectors underperforming can offset losses more than they would from a market-weight basket. However, if a sizeable market-cap weight sector performs exceedingly well, the equal-weight index can also dramatically outperform the market-weight index.
An equal-weight index can also be another way to measure the internal health of the underlying index (SPX) or market breadth. Not favoring larger-cap companies offers a better and more accurate picture of the entire market.
Just because equal and market cap SPX ETFs hold the same names in the basket does not mean they will perform similarly.
Equal-weight indexes can easily underperform or outperform market-weight indexes due to overall market conditions and the performances of the largest sectors and mega-cap stocks.
During devastating bear market declines, investors tend to favor the safety of larger-cap names. An equal-weight index with many smaller and illiquid companies may be vulnerable to higher volatility during a sharp market selloff.
Equal-weight indexes are popular for investors who seek broader diversification and less concentrated positions. Although equal-weight indexes have historically outperformed market-weight indexes over the long term, they tend to be more volatile, especially during bear markets.
Most of the time, the equal-weight RSP and the market-cap weight SPX and SPY will trade together, trending up or down in the same direction. However, during adverse market conditions or market inflection points, the divergences between the two markets can signal an impending trend change.
A brief review of the RSP and SPY shows subtle divergences between the two ETFs.
SPY has broken out of several key levels, including 438.14 (11/10/23), 441 (11/14/23 downtrend and gap-up breakout), 452.08 (11/20/23), and 457.82 (12/1/23). The Dec 2023 surge above the 7/27/23 high confirms a higher-high pattern and suggests a retest of the Jan 2023 all-time high (467.13).
RSP has also broken out above several key resistances, including 143.50 (11/14/23 gap-up breakout) and 150.52 (12/4/23 breakout), suggesting a rally toward the 7/27/23 reaction high (155.10). Until 150.52 is surpassed, there remains a lower-high pattern.
SPY is the relative strength leader between the two ETFs, evidenced by the higher-highs pattern in SPY and the lower-highs in RSP. If RSP convincingly clears 155.10, the equal-weight ETF will catch up to its market-cap weight ETF with a rally toward 159.73 (Jan 2022 all-time highs). However, if the divergence persists between SPY and RSP, this warns of the lack of market breadth and broad market pullback.
RSP - A symmetrical triangle breakout above 155.10/159.73 suggests 33.71 points or an SPX target at 188.81 and 193.44. It is bullish that the 10-mo ma (145.61) has climbed above the 30-mo ma (145.06), suggesting a monthly golden cross buy signal. The monthly moving averages also provide pivotal support on pullbacks.
SPY - A recent breakout above 457.82 hints at +124.42 points or a retest of the Jan 2022 all-time highs (467.13) and above 582.24 (breakout projection). The recent Dec 2023 breakout (457.82) is key initial support. The 10-mo ma at 434.71 provides intermediate-term support, and the 30-mo ma at 418.30 offers longer-term support.
SPY has broken out above key resistance at 457.82, suggesting a retest of the Jan 2021 all-time high (467.13) and above 582.24 (breakout projection, over time). RSP is slightly behind the SPY in terms of a breakout. However, a convincing surge above 155.10 confirms a breakout and renders a retest of 159.73 (Jan 2022 all-time highs) and above 188.81/193.44 over time. If both ETFs break out to new all-time highs, this reaffirms the May 2013 structural bull trend.