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SPY has long been the king of exchange traded products. Hitting the market in 1993, this fund has amassed nearly $100 billion in assets making it not only the largest ETF in the world, but also one of the largest funds available to investors. Its ultra low expenses and massive daily volume have allowed it to be both a trading instrument as well as an integral part of long term portfolios. But for the past few years, the fund has been in a stiff competition with its equal weighted counterpart, the S&P Equal Weight ETF (RSP) [see also 12 High-Yielding Commodities For 2012].

Rivalry

The rivalry between these two funds can be traced back since RSP debuted in 2003. While SPY has won the battle in some years, others have seen RSP wipe the floor with the ETF top-dog. For those unfamiliar with RSP’s strategy, the fund is comprised of the exact same 500 holdings as SPY, but rather than overweighting any one holding (the top ten holdings of SPY account for over 20% of the product) RSP grants an equal weight to each security, giving a smaller company like Micron Technology the same weight as Exxon Mobil. But with this strategy comes the drawback of higher expenses, as RSP charges 31 more basis points than its S&P 500 counterpart [see also Equal Weight ETFs: Comparing Similar (But Different) Strategies].

Ticker 2008 2009 2010
SPY -36.7% 26.3% 15.0%
RSP -40.0% 44.6% 21.4%

Over the past few years, it seems that a clear trend has emerged regarding the performance of these two products. When markets are stable and strong, RSP tends to outperform, but the opposite is true during tough years. Although both suffered significant losses when the recession hit in 2008, SPY held its ground noticeably better than RSP. Despite the fact that RSP has better three and five year returns, that may not be enough to convince investors given that unstable markets seem to hit RSP especially hard. The likely reason behind this lies in the equal weight strategy. Because RSP gives every holding the same weight, smaller companies have just as much say as something like Apple or IBM. When times are tough, smaller companies tend to perform worse than their large cap counterparts, trickling down into the trend that RSP typically falls into [see also Ten Unexpected Observations On YTD ETF Returns].

2011 In Review

Ticker 2011 Inflows (mm)
SPY -1.89% 6,298
RSP -0.67% (447)

So how did these two strategies fare in a year that featured choppy markets? RSP had the edge for the first half of the year, as markets were relatively stable, but that all came to a head once August rolled around. With the euro debt crisis heating up and the first ever downgrade of U.S. debts by a domestic firm, Standard & Poor’s, markets went haywire, allowing SPY to take the lead and hold it through the end of the year. Though its performance was only marginally better, SPY was able to rake in 2011 cash inflows of over $6.2 billion while RSP actually saw an outflow of $447 million [see also ETFs: The $10 Billion Club].

So now the biggest question that remains is what these figures will look like when 2012 comes to an end. Just remember that the trend is your friend when it comes to these two funds. If markets are performing well and data continues to point towards a recovery, RSP will likely take back its lead (it is currently winning through the first few weeks of this year), but if we have another up and down year plagued with volatility, SPY should come out on top at the end of the year.

Disclosure: No positions at time of writing.

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Source: RSP Vs. SPY: 2011 At A Glance