RSP’s Returns Double SPY’s, ConvergEx Says

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The Rydex S&P Equal Weight ETF (NYSEArca:RSP) has returned more than twice as much as the SPDR S&P 500 ETF (NYSEArca:SPY) this year, with just 20 percent more risk, raising questions about the validity of capitalization weightings in index ETFs, ConvergEx Chief Market Strategist Nicholas Colas says.

While the equal-weighted Rydex S&P ETF, with year-to-date returns of 8.59 percent, was far and away the best of the five S&P 500 funds ConvergEx looked at, all beat SPY's 4.2 percent gain, with returns clustered around 4.5 to 5.5 percent, Colas wrote in his daily briefing on Oct. 22.

"I am not ready to say that we should ditch market cap weighting altogether, but the data here is certainly a case study in how to consider portfolio composition," Colas wrote in the briefing. "The same stocks, assembled in different ways, yield very different outcomes."

Colas stressed that risk is a crucial variable in choosing investments and, RSP's relatively heavy exposure to the relatively volatile materials sector was the main reason it outperformed its competitors. ConvergEx measured risk as the standard deviation of daily returns, Colas said.

"That outlier performance of the equal-weighted RSP is the result of incremental risk-taking, but not very much, really. For less than 20 percent more risk, you have been able to essentially double your returns so far into the year," said Colas, who talked to IndexUniverse.com recently about growing risks of a double-dip recession in the U.S.

Included among the S&P 500 ETFs, or acceptable proxies, that ConvergEx looked at and their year-to-date returns were:

  • SPDR S&P 500 ETF (NYSEArca:SPY), 4.24 percent
  • RevenueShares Large Cap ETF (NYSEArca:RWL), 5.48 percent
  • WisdomTree Earnings 500 ETF (NYSEArca:EPS), 4.35 percent
  • WisdomTree LargeCap Dividend ETF (NYSEArca:DLN), 5.33 percent
  • Rydex S&P Equal Weight ETF (NYSEArca:RSP), 8.59 percent
  • ALPS Equal Sector Weight ETF (NYSEArca:EQL), 4.73 percent

Colas noted that something like $3.5 trillion of capital is benchmarked to the S&P 500 Index, and almost $1 trillion is indexed directly to it, showing just how deeply entrenched the S&P 500 index has become in the fabric of modern finance.

SPY is the most popular exchange-traded fund in the U.S. and the biggest ETF in the world. It had $4.91 trillion in turnover through September and, through Oct. 20, had $80.51 billion in assets, according to data compiled by IndexUniverse.com.

RSP vs SPY

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2010 Index Publications LLC . All Rights Reserved.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: DLN , EPS , EQL , RSP , RWL , SPY

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