U.S. market diversification with an Equal weight index ETF.
Does an Equal-weight U.S. ETF diversify and complement a U.S. market cap-based ETF?
Compare the top 10 of the S&P 500 market cap weighted (SPY) to the Rydex S&P 500 equal weight ETF (RSP). (Compare to iShares’ IVV, Vanguard’s VV, BMO’s ZEU (hedged) … they are nearly identical to SPY. Claymore US fundamental weight ETF CLU.C isn’t much different).
|State Street Global Advisors SPDRS.com S&P 500 market cap index ETF (SPY) MER 0.10%||Rydex-SGI.com S&P 500 Equal-weight index ETF (RSP) MER 0.40%|
|Exxon Mobil||3.43%||NVIDIA CORP||0.32%|
|Apple Inc||2.66%||MICRON TECHNOLOGY||0.25%|
|General Electric||1.85%||MARATHON OIL||0.25%|
|Procter & Gamble||1.55%||MASSEY ENERGY||0.24%|
|JP Morgan Chase||1.50%||BAKER HUGHES||0.24%|
|Wells Fargo||1.44%||INTUITIVE SURGICAL||0.24%|
|Johnson & Johnson||1.42%||DEVON ENERGY||0.23%|
What about performance?
|1 Year||10 Year||20 Year|
|S&P 500 Market cap weighted||15.0%||1.4%||9.1%|
|S&P 500 Equal weighted||21.9%||6.2%||11.8%|
To December 31, 2010, small-mid caps have outperformed large cap stocks. The performance differential is due to what Credit Suisse empirical data indicates is the long-term premium for a portfolio skewed towards small and mid caps. An Equal weight ETF skews the portfolio toward smid caps.
Does a GDP weighted index complement and diversify a market cap index?
Doug Cronk, CFA is Manager, Investments for a Canadian Pension fund.