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The Easiest Way to Beat the S&P 500

|Includes: Guggenheim S&P 500 Equal Weight ETF (RSP), SPY

 



You say it's impossible to beat the market? This is aimed towards the efficient market and Boglehead crowd. I pose to you a large cap passive index fund that has beaten the S&P500 after fees over the last year, 5 years, and by a huge 8.78% YTD. It goes by ticker symbol RSP, the equal-weight S&P 500 index.
 
Increasingly popular, it trades over 1.3 million shares per day on average, and it beats the market the same way that monkeys beat the average human stockpicker. In the famous stockpicking test, monkeys threw darts at a dartboard where stock ticker symbols were laid out at random. The "stock picks" of the monkeys outperformed the human investors. The S&P 500 is market-cap weighted, meaning that the largest companies have the biggest positions in the index. Truer diversification would mean blindly picking the companies and giving them all the same weight, as there is no more confidence in one firm than in another. The only cost to you is a 40bps expense ratio, which is 32bps per year above the SPY.
 
If no one can beat the market, why give the largest companies more weight? The only way that RSP diverges from the index is by giving the smaller companies a higher weighting, which over time would capture more returns due to small-cap bias, which is well documented by even the grandfathers of the efficient market hypotheses, Fama and French.
 
So if you have pledged yourself and your retirement plan to the undying belief that markets cannot be beaten over the long run, check out RSP. My only short-term caveat to this is that this market rally has been lead by the more beaten-down stocks, and while the equal-weighting thesis will hold up for the longer term, the rest of the year may see this prior outperformance flip to underperformance.
 
Do you think that equal-weighting won't beat the S&P 500? Shoot me a line in the comments section; I'd love a discussion.
 
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