Skip to Content
ETF Specialist

In the Performance Race, This Fund Is on the Wrong Track

Equal-weighting has merit, but make sure you measure with the proper benchmark.

Mentioned: , , , , ,

Over the past 10 years,  Guggenheim S&P 500 Equal Weight (RSP) has crushed the S&P 500, returning 9.48% per year compared with 7.23%. However, a quick glance at the Morningstar Style Box should alert investors that this is a poor comparison. The RSP portfolio behaves more like a mid-cap portfolio than the large-cap S&P 500. By that score, RSP has underperformed the S&P MidCap 400 by more than a percent per year. While fund marketers might like to advertise equal-weighting as providing a smarter beta or better diversification, the truth is that it is closer to a bait-and-switch. While the exposure is clearly mid-cap, equal-weighting does generate legitimate alpha from the forced buy low-sell high rebalance strategy. Investors would keep more of this alpha if it weren't for the fund's relatively high expense ratio of 0.40%

A Better Beta
Of all of the non-market-cap-weighted investment strategies, the simplest to conceptualize is equal-weighting. Here, each stock has the same weighting in the portfolio. In the equal-weighted version of the S&P 500 Index, giant caps like  Apple (AAPL) carry the same heft as mid-caps like  AutoNation (AN), despite the fact that Apple has a market cap more than 200 times larger. Thus, the fund is a better supplement for mid-cap exposure and is best used as a satellite or tactical position rather than a core holding.

To view this article, become a Morningstar Basic member.

Register for Free

Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.