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RSP ETF Review - Is Equally Weighting Stocks a Good Idea?
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RSP is an interesting and extremely popular fund that equally weights companies in the S&P 500. Is it a good investment? I review it here.
// TIMESTAMPS:
00:00 - Intro - What, Why, and How
01:46 - Is RSP a Good Investment?
05:34 - Conclusion and Outro
// SUMMARY:
RSP is the Invesco S&P 500 Equal Weight ETF. It launched in early 2003. As the name suggests, the fund simply takes all the stocks in the S&P 500 Index and weights them equally, as opposed to the index’s inherent market cap weighting scheme in which larger companies get more representation.
In this case specifically, each of the 500 stocks – including Apple and Microsoft – should make up around 1/500th (or 0.2%) of the total fund.
RSP had more notable outperformance in its early years when smaller stocks were doing well, thereby compensating investors for its greater fee. In recent years, the story has been a bit different, with large cap tech stocks dominating the U.S. stock market.
And there’s sort of the rub. At the end of the day, an equal weighting scheme on an otherwise cap weighted index is effectively just an indirect way to slide one’s exposure down the market cap scale toward smaller stocks. Specifically, RSP avoids the concentration in mega caps in the S&P 500 and provides more exposure to smaller large caps within it, which we would technically consider mid cap stocks. RSP effectively behaves like a mid-cap fund.
This fact is illustrated in its factor exposure, with small positive loadings on both Size and Value, due again to its avoiding the concentration in large cap growth stocks.
This corroborates RSP’s historical performance, as we expect these equity risk factors to pay a premium over the long term, and a higher beta just means more market risk.
The takeaway here that you may have realized already in all this is that we can achieve the same exposure RSP provides in a much more efficient and direct manner by simply deploying a dedicated small cap value fund alongside an otherwise cap weighted core holding in a well-diversified portfolio. I do precisely that in my own portfolio. Put another way, RSP is a naive, inefficient way to gain exposure to the factors responsible for its returns.
Specifically, we can replicate RSP’s factor exposure with roughly 71% VOO and 29% VIOV. This combo conveniently has much lower turnover and costs about 0.06% in fees, compared to 0.20% for RSP.
In conclusion, in investigating the merits of RSP, we find yet another popular, well-marketed fund that sounds nice on the surface but that probably isn’t worth its fee and greater trading costs.
#stockmarket #etf #etfs
// INVEST
// SOCIAL
I appreciate all the support!
Disclosure: Some of the links above are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality content on this channel and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful.
// TIMESTAMPS:
00:00 - Intro - What, Why, and How
01:46 - Is RSP a Good Investment?
05:34 - Conclusion and Outro
// SUMMARY:
RSP is the Invesco S&P 500 Equal Weight ETF. It launched in early 2003. As the name suggests, the fund simply takes all the stocks in the S&P 500 Index and weights them equally, as opposed to the index’s inherent market cap weighting scheme in which larger companies get more representation.
In this case specifically, each of the 500 stocks – including Apple and Microsoft – should make up around 1/500th (or 0.2%) of the total fund.
RSP had more notable outperformance in its early years when smaller stocks were doing well, thereby compensating investors for its greater fee. In recent years, the story has been a bit different, with large cap tech stocks dominating the U.S. stock market.
And there’s sort of the rub. At the end of the day, an equal weighting scheme on an otherwise cap weighted index is effectively just an indirect way to slide one’s exposure down the market cap scale toward smaller stocks. Specifically, RSP avoids the concentration in mega caps in the S&P 500 and provides more exposure to smaller large caps within it, which we would technically consider mid cap stocks. RSP effectively behaves like a mid-cap fund.
This fact is illustrated in its factor exposure, with small positive loadings on both Size and Value, due again to its avoiding the concentration in large cap growth stocks.
This corroborates RSP’s historical performance, as we expect these equity risk factors to pay a premium over the long term, and a higher beta just means more market risk.
The takeaway here that you may have realized already in all this is that we can achieve the same exposure RSP provides in a much more efficient and direct manner by simply deploying a dedicated small cap value fund alongside an otherwise cap weighted core holding in a well-diversified portfolio. I do precisely that in my own portfolio. Put another way, RSP is a naive, inefficient way to gain exposure to the factors responsible for its returns.
Specifically, we can replicate RSP’s factor exposure with roughly 71% VOO and 29% VIOV. This combo conveniently has much lower turnover and costs about 0.06% in fees, compared to 0.20% for RSP.
In conclusion, in investigating the merits of RSP, we find yet another popular, well-marketed fund that sounds nice on the surface but that probably isn’t worth its fee and greater trading costs.
#stockmarket #etf #etfs
// INVEST
// SOCIAL
I appreciate all the support!
Disclosure: Some of the links above are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality content on this channel and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful.
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