RSP ETF, the equal weighted S&P 500 gets little love but it deserves more

Index investors have a choice for investing in large cap stocks that mostly make up the S&P 500 index of using the Cap weighted SPY ETF or the equal weighted RSP ETF.

There are pros and cons to each type of investment.

The Pros for the SPY and RSP:

• SPY – Heavily weighted in the biggest stocks with 30.5% of the ETF invested in the 10 biggest companies. This works well when the biggest stocks in the index are in the favor on Wall Street.
• SPY – Large and liquid ETF with over 408 Billion in assets.
• RSP – Equal weighted across all S&P 500 stocks with 3% of the ETF invested in the 10 biggest companies. This works well when the biggest companies in the S&P 500 are not in favor on Wall Street
• SPY – Outperformed RSP in years 2006, 2007, 2011, 2015, 2017, 2018, 2019. 2020. The largest outperformance during those years was 2020 when it beat the RSP by 5.6%.
• RSP – Outperformed SPY in years 2004, 2005 , 2009, 2010, 2012, 2013, 2014, 2016, 2021, 2022. The largest outperformance during those years was 2009 when it beat the SPY by 18.2%.
• RSP – From 12/30/2003, a buy and hold with reinvesting dividends and no compounding yielded a 457.9% return. The same period with the same criteria for SPY yielded a 396.3% return. RSP wins the 19 year comparison.

The Cons for SPY and RSP.

• SPY – When the top ten stocks by holding % are not in favor on Wall Street, the SPY underperforms more balanced ETF’s such as RSP.
• RSP – When the top ten stocks in SPY are in favor on Wall Street, the RSP ETF will underperform the SPY.
• SPY – Over time, the RSP will outperform the SPY slightly.
• RSP – Since it is a smaller ETF than SPY, the liquidity is not as great as the SPY, but it is still robust.
• RSP – The management fee is 0.11% more than SPY.

The SPY has outperformed the RSP this year by 9.9%. That is 15.8% compared to 5.9%. By historical standards, this is the largest yearly gap ever. Previously, SPY beat RSP in 2020 by 5.6% which is its highest beat. The SPY appears driven by a handful of big cap stocks that seem way overpriced. The top cap stocks are listed below with some fundamental data from the latest quarter:

• AAPL – Revenue Year over Year -2.5% with Price/Sales 7.6
• MSFT – Revenue Year over Year 7.1% with Price/Sales 12.3
• AMZN – Revenue Year over Year 9.4% with Price/Sales 2.5
• NVDA – Revenue Year over Year -13.2% with Price/Sales 41.1
• GOOGL – Revenue Year over Year 2.6% with Price/Sales 5.6
• TSLA – Revenue Year over Year 24.4% with Price/Sales 10.5
• META – Revenue Year over Year 2.6% with Price/Sales 6.2
• BRK.B – Revenue Year over Year 20.6% with Price/Sales 2.3
• XOM – Revenue Year over Year -4.4% with Price/Sales 1.1

As you can see, the top cap stocks in the S&P 500 as a group, are not looking too good on the fundamentals. Only TSLA and BRK.B managed to give an over +10% increase in Revenue Year over Year.

Conclusion: Even thou the SPY is outperforming this year when compared with the RSP, there is every reason to be believe this gap will narrow before the end of the year. Since RSP slightly outperforms the SPY over time, RSP would be the S&P 500 Index fund to buy right now.