Exploring the Advantages of Equal-Weight ETFs in Modern Investing

Equal-weight ETFs represent one of the earliest forms of smart beta investing strategies. Unlike cap-weighted funds that allocate more weight to companies with larger market capitalizations, equal-weight ETFs assign an identical weight to each holding. For instance, an equal-weight ETF with 100 stocks typically assigns about 1% weight to each stock during portfolio rebalancing.

Today, the U.S. market hosts hundreds of equal-weight ETFs, with the Guggenheim S&P 500 Equal Weight ETF (RSP) standing out as a leader. Launched in April 2003, RSP manages $15.6 billion in assets and has earned high ratings from Morningstar, including 3 stars for 3 and 5 years and 4 stars for 10 years and overall performance among large blend funds.

Investors are drawn to equal-weight funds because they address the uneven distribution of market returns, where a few stocks often dominate performance each year. Since future top performers are unpredictable, equal weighting reduces reliance on a handful of large-cap stocks. Historical data from S&P Dow Jones Indices shows that in 23 of the last 27 years, the median S&P 500 stock underperformed the average, highlighting the benefit of diversification through equal weighting.

Since its inception, RSP has delivered a total return of 386.2%, including dividends, outperforming the cap-weighted SPDR S&P 500 ETF (SPY), which returned 292%. Critics sometimes attribute smart beta outperformance to factors like size or value, and in RSP’s case, the tilt towards smaller-cap stocks plays a significant role.

While emphasizing small caps can increase volatility, RSP’s annualized volatility since inception is only marginally higher than SPY’s by 1.7%. Equal-weight strategies don’t guarantee success every year—for example, 2017 was an exception when large tech stocks propelled SPY ahead. However, over the past 28 years, equal-weight indices have outperformed 16 times with an average annual advantage of 1.5%, benefiting from the positive skewness in market returns.

Between 2012 and 2017, RSP lagged behind SPY only twice, in 2015 and 2017, demonstrating consistent competitive performance. For investors seeking cost-effective options, there are equal-weight ETFs available with lower fees.

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