This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

S&P Fund Tops the S&P 500

Stocks in this article: RSP SPY MSFT CSCO CVX GE

NEW YORK ( TheStreet ) -- Long-term shareholders of S&P 500 funds have reason to be satisfied. During the past 10 years, SPDR S&P 500 ETF (SPY) returned 7.8% annually. But investors could have gotten richer results with Guggenheim S&P 500 Equal Weight (RSP), which returned 10.6% annually.

As the name suggests, Guggenheim puts an equal amount of assets in each of the 500 stocks. Can the equal-weight fund top the traditional S&P 500 during the next decade? Probably. Under a variety of market conditions, the equal-weight fund has some key advantages over standard competitors.


Like most benchmarks, the traditional S&P 500 is weighted by market capitalization. So a stock with the greatest market value carries the heaviest weight. Exxon Mobil (XOM), the biggest stock in the benchmark, accounts for 2.8% of the assets in an S&P 500 index fund. The smallest holdings, such as Big Lots (BIG), account for 0.01%.

Many academics have long argued that market-cap weighting is the most efficient way to operate index funds. But there are notable problems with traditional benchmarks. When markets become overheated, the most popular stocks can account for an outsized percentage of assets. That exposes investors to significant risks.

During the Internet bubble, the technology component of the S&P 500 soared from 13% of assets in 1998 to 33% in March 2000. A handful of mega-cap names -- including Microsoft (MSFT) and Cisco Systems (CSCO) -- accounted for a sizable percentage of assets. When technology crashed, investors in index funds suffered painful losses.

To avoid placing big bets on individual stocks and sectors, more investors have begun gravitating to equal-weight benchmarks. The Guggenheim fund puts 0.20% of assets in each of the S&P 500 stocks. Every quarter, the portfolio rebalances, selling off appreciated shares to bring weightings back in line. The value of steering away from hot shares became clear when the Internet bubble burst in 2000. For the year, the S&P 500 lost 9.1%, while the S&P 500 equal-weight benchmark gained 9.6%.

Because it does not overweight the biggest shares, Guggenheim has a greater emphasis on the smaller stocks in the S&P 500. Many studies have shown that smaller stocks outdo larger ones over the long-term. In recent decades, the mega caps have trailed smaller names, providing a big edge for the equal-weight approach.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,164.95 -251.90 -1.45%
S&P 500 1,994.99 -26.26 -1.30%
NASDAQ 4,635.24 -48.1670 -1.03%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs