In today's world of investing, there are a multitude of products available to investors to gain exposure to the stock market. One of the most popular ways to invest is through exchange-traded funds, or ETFs. ETFs are a basket of securities that track/'>rack a specific index, sector, or industry, providing investors with diversified exposure to the market.
One of the most popular ETFs is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. The S&P 500 Index is a market capitalization-weighted index, which means that the largest companies in the index have a larger weighting than the smaller companies.
However, there is another ETF that tracks the S&P 500 Index, and that is the Invesco S&P 500 Equal Weight ETF (RSP). RSP tracks the same index as SPY, but instead of being market capitalization-weighted, it is equal weighted.
What is an equal-weighted index?
An equal-weighted index is an index that gives each company in the index an equal weighting, regardless of its market capitalization. This means that smaller companies have the same weighting as larger companies.
What is a quality-weighted index?
On the other hand, a quality-weighted index is an index that weights companies based on certain fundamental factors, such as earnings, revenue, return on assets, and dividend yield. The goal of a quality-weighted index is to provide exposure to high-quality companies that have strong financials and are less likely to experience financial distress.
Now, let's take a closer look at which ETF is better: SPY or RSP.
Historical performance
According to a detailed analysis on Seeking Alpha (remove brand name), RSP has historically outperformed SPY with a 1.03% higher average 1-year total return. The analysis looked at the period from 2003 to 2021 and found that RSP had an average annual return of 10.85%, while SPY had an average annual return of 9.82%.
This outperformance can be attributed to the fact that RSP is equal weighted, which means it has a higher exposure to smaller companies that have historically outperformed larger companies.
Quality-weighted index
If we compare RSP to a quality-weighted index ETF, such as the Invesco S&P 500 Quality ETF (SPHQ), we can see that RSP has a slightly lower exposure to high-quality companies. SPHQ focuses on companies that have high-quality financials, such as consistent earnings and strong balance sheets.
RSP, on the other hand, has exposure to companies of all qualities, but with an equal weighting. This means that the overall quality of RSP's holdings may not be as high as SPHQ's, but RSP still outperformed SPY historically, indicating that the equal weighting strategy has its own strengths.
In conclusion, RSP has historically outperformed SPY and provides a unique exposure to the S&P 500 Index through equal weighting. While RSP may not have the same focus on high-quality companies as a quality-weighted index ETF, it still offers its own advantages. Investors should consider their investment goals and risk tolerance when choosing between these two ETFs.