When Things are Equal it Can Be Good

When is AAPL the same as EMBC? When they are inside of ETF RSP.

Most investors are aware of the ETFs and mutual funds that are designed to track the S&P 500 index. The common ones are SPY, VOO, and IVV. There are other types of ETFs that track the S&P 500 differently. Two you might not know about are RSP and EQL. They are equal weighted while the other three are cap-weighted.

If something is equal weighted, it means each of the components is of the same weight. For example, if I have ten apples, and each of them weights ½ pound, then the apples are equal weighted. So if I have 500 apples, all 500 would be similar in size and weight.

If something is not equal-weighted, it means the apples come in different sizes and weights. So I might have some really big apples, some medium-sized apples, some small apples, and some crab apples. In my basket of 500 apples, some of them make more applesauce with fewer apples. If you are making pies, this might be good. Investing, however, is a different situation.

Equal Weighting Stock Investments

I invest primarily in stocks and in ETFs like VYM, SCHD, and DGRO. When I buy stocks, I am mindful of the size of the position I am buying. If I buy 100 shares of AVGO, it is far different than buying 100 shares of AMD or AAPL. The reason is simple. One hundred shares of AVGO would have a cap weighting of $48,211.00 in my portfolio, while 100 shares of AMD are only $6,385.00. One hundred shares of Apple, by way of contrast would weigh in at $13,950.00.

If I bought 100 shares of each, I would spend a total of $68,546. However, this would potentially be a greater risk. The reason is that AVGO would make up 70% of the total dollars invested. This is similar to how the investments are weighted in the cap-weighted ETFs like SPY, VOO, and IVV.

SPW – S&P 500 Equal Weight Index

Each of the 500 stocks is an equal slice of the total investment pie.

The S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.

Invesco S&P 500 Equal Weight ETF (Ticker RSP)

RSP did “cut” dividends in 2016. The overall trend, however, makes me interested in this ETF.

There are several things about this ETF that make it a useful investment choice for many investors. The expense ratio is reasonable at 0.20%, the Seeking Alpha QUANT rating is 4.18, the dividend yield is 1.75%, it contains the companies of the S&P 500 index, so it is diversified, and the top ten investments only make up 2.60% of the total investments in the fund. This makes it stand out against other S&P 500 index funds. Because it is an equal weight ETF, the fund is only down 14.15% YTD, compared to VOO which is down 20.08%, IVV which is down 20.06%, and SPY which is down 20.04%.

This illustrates why I would invest more in VYM, DGRO, and SCHD. RSP is a wild ride.

RSP invests in stocks of companies operating across diversified sectors. It invests in growth and value stocks of large-cap companies. The fund seeks to track the performance of the S&P 500 Equal Weight Index, by using full replication technique. Strictly in accordance with its guidelines and mandated procedures, the index provider compiles, maintains, and calculates the underlying index, which consists of all of the components of the S&P 500® Index. Benchmark: S&P 500 Equal Weighted TR USD. This means RSP strives to have each of the 500 companies in the S&P 500 weighted at 0.2% of the 500 companies. 500 x 0.2% is 100%.

ALPS ETF Trust – ALPS Equal Sector Weight ETF (Ticker EQL)

EQL has performed well in the bear market. The current QUANT rating is also favorable.

This fund is interesting because it tries to do an equal weighting of investments by sector. EQL invests in the public equity markets of the United States. It invests through other funds in stocks of companies operating across diversified sectors. The fund invests in growth and value stocks of companies across diversified market capitalizations. It seeks to track the performance of the NYSE Equal Sector Weight Index, by using full replication technique. In order to track the underlying index, the fund will use a “fund of funds” approach and seek to achieve its investment objective by investing at least 90% of its total assets in the shares of the Underlying Sector ETFs. The underlying index is an index of ETFs comprised of all active Select Sector SPDR® ETFs in an equal weighted portfolio.

EQL’s pie of the sectors shows the balance is approximately Equal.

The ten ETFs within EQL are: Energy Select Sector SPDR ETF, Industrial Select Sector SPDR ETF, Health Care Select Sector SPDR ETF, Financial Select Sector SPDR ETF, Consumer Staples Select Sector SPDR ETF, Materials Select Sector SPDR ETF, Technology Select Sector SPDR ETF, Communication Services Select Sect SPDR ETF, Consumer Discretionary Select Sect SPDR ETF, and Real Estate Select Sector SPDR. Note that these have to be rebalanced when one sector shoots higher than all of the others.

At some point EQL will sell some of the Energy sector and buy more Real Estate. At least I believe they will.

SPY VOO and IVV are Cap-Weighted

Vanguard S&P 500 ETF (VOO), SPDR S&P 500 Trust ETF (SPY), and iShares Core S&P 500 ETF (IVV) are all me-too funds. They are really the same in almost every regard, so pick any one of the three if you like the cap-weighted approach. However, when you do this, bear in mind that the top ten stocks will make up more than 26% of your total invested dollars.

The reason is that the top ten are always going to be the same in all three ETFs. The top ten stocks are, by cap-weighting, Apple Inc, Microsoft Corp, Amazon.com Inc, Tesla Inc, Alphabet Inc Class A, Berkshire Hathaway Inc Class B, UnitedHealth Group Inc, Alphabet Inc Class C, Exxon Mobil Corp, and Johnson & Johnson. In good times, this can be good. In bad times and bear markets, perhaps not quite so appealing.

Comparing All Five

Here are some different ways to consider these five ETFs.

Two Types of ETFS: Cap-Weighted and Equal Weighted. Both are interesting choices.
Cap-Weighted ETFs seem to have an advantage in the 10-year performance, but not in YTD performance.
RSP might be a better choice for dividend growth when you compare all five.

Full Disclosure

Cindie and I do not own shares of any of these ETFs. However, I think I would probably buy RSP before I would buy SPY, VOO, or IVV. I think it is a better strategy for diversification. I would add RSP and maybe a small slice of EQL to my VYM, DGRO, and SCHD mix.