Avoiding The Weight In The S&P 500

| About: Guggenheim S&P (RSP)


The S&P 500 rally in 2017 was mostly driven by numerous stocks.

Investors have an alternative to manage the risk of the high weight of the big Cap components within the index.

Here is one approach.

As of May 2017 the S&P 500 total return this year is at ~8% bringing the index to its at all times high.

The index is a composition of 500 stocks and is weighted by the companies' market capitalization.

Naturally the weights are pretty much different between the stocks and the weights are shown in the next chart taken from slickcharts.com:

In times when the stocks that have high weights are moving at the same direction the index would face a significant movement.

Take for example the situation since the beginning of 2017. The Index went up by ~8%. During that time period Apple Inc. (AAPL), which carries the highest weight in the index, went up by 33%. That means that out of the total 8% return of the S&P500, 1.3% has been contributed by a single holding.

The next table summarizes the contribution of the top-15 big Cap stocks in the S&P 500 which hold the highest weights.

The table has the stock weight in the index (column A), the YTD return (column B), the contribution of return to that of the index (column C), and the distribution of this contribution to the Index total return (column E).

There are several conclusions taken from this table:

The total return of the S&P 500 is highly dependent on the performance of the top-weight companies. It might be trivial, but the top 15 Big Cap stocks carry 25% of the index value, or in other words, the remaining 485 stocks carry only 75% of the index value.

The stocks in the list contributed 3% to the S&P 500's 8% total return YTD. In fact if taking only the Top-10 stocks in the list, up to Alphabet Inc. (GOOG), the contribution is 3.3% or 46% of the S&P 500 total return.

It is very clear that the rally in the Technology stocks led to the S&P 500 rally. Other giant companies, from a variety of different sectors had a much poorer performance and by that had a negative impact on the index total return.

The question from this point is whether the big Technology stocks would continue this rally and push the S&P 500 even further, or is it time to the other components of the index to make a move.

Investors who might be concerned about the huge weight of the Technology stocks specifically or about the high weight that the Big Cap carry within the index could consider Guggenheim S&P 500 Equal Weight ETF (RSP).

The uniqueness of the ETF is that each of the different stocks holds the same weight. So huge corporations and small companies would have an even impact on the total return.

The next table compares RSP's performance to this of SPY, as a representative of the S&P 500 Index.

As expected, the short term return, during 2017 the S&P 500 had a higher return compared to RSP. It is also true if looking at the recent year and two years total return.

But, when looking at the long term performance, during the recent five and ten years, including the 2008 market meltdown, RSP delivered better returns. About 1-2% better yearly return in average.

RSP carries a Beta of 1.02 which means that the ETF is expected to be more volatile than the S&P 500.

The next graph, taken from yahoo finance, compares the 10 years performance of the two ETFs. RSP's dip in 2008 was lower that SPY's, but RSP's slope during the recent eight years is sharper delivering 20% higher return during this timeframe.


RSP could be an interesting alternative to equity investors who see high potential in medium and small cap components within the S&P 500 index.

Naturally it could go both ways and the volatility of this ETF should be considered by the investors.

Happy investing.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RSP over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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