If I told you I had two baskets of stocks, and that both baskets contained the same stocks, you might immediately assume that both baskets have performed the same. After all, they are the same stocks, right? But that’s not the case – as you can see by comparing the SPDR S&P 500 ETF (SPY) and the Invesco S&P 500 Equal Weight ETF (RSP), writes Jim Woods, editor of Investing Edge.
While the two baskets might hold the same names, it’s the weighting of the names in the two baskets that would account for their relative outperformance. Allow me to use a real example here to illustrate this point, and for this I am going to rely heavily on two charts.
First, the same stocks here are those in the S&P 500 Index. The benchmark measure of the domestic equity market is the one most market pundits like me use when we refer broadly to “the market.”
If we use a market-cap-weighted basket of stocks in the S&P 500, such as SPY, then we get a different performance value from that of the equal-weighted basket of the S&P 500 such as the RSP.
While both Exchange Traded Funds (ETFs) own the same 500 companies, in the case of SPY, they aren’t all owned in equal amounts. Because stocks with higher market capitalizations are held in higher percentages based on that market capitalization, you get outsized exposure to the biggest stocks in the S&P 500 with SPY.
Which stocks are these? Well, see if these five names sound familiar: Apple Inc. (AAPL), 7.21%, Nvidia Corp. (NVDA), 5.93%, Microsoft Corp. (MSFT), 5.87%, Amazon.com Inc. (AMZN), 3.93%, and Meta Platforms Inc. (META), 2.89%.
Let’s take a look at the chart of SPY over the past six months. As you can see, the bull has been stampeding here, despite the recent pullback below the 50-day moving average (blue line).
Now look at the chart of the equal-weight S&P 500, RSP, over the same period. As you can see, this chart has actually been more volatile over the past year. However, of late RSP has actually outperformed SPY. In fact, year to date, SPY had recently posted a total return of 1.4%. But that gain was about half of the YTD rise that RSP had posted (2.8%).
Now, this is only a couple of months. But the recent outperformance of RSP is how a material change in market character starts, and it is something I’ll be watching closely as the year unfolds. If the market is making a transition from mega-cap-tech outperformance to broad-market outperformance, that is a tradable trend we will take advantage of as an individual investor.
