Yes, This Equal-Weight ETF Really Works

With smart or strategic beta exchange-traded funds receiving so much attention (and new assets), some investors might assume these funds are relatively new kids on the ETF block.

That is not the case.

At this point, equal-weight ETFs could be considered classics or the grandfathers of the strategic beta phenomenon.

Equal-Weight ETF RSP

Look at the Guggenheim S&P 500 Equal Weight ETF RSP. The equal-weight answer to traditional S&P 500 index funds celebrated its 12th anniversary in April and currently has $9.55 billion in assets under management.

Over the years, RSP has risen to acclaim for a good reason: Performance. Rather, out-performance of standard S&P 500 funds. There has been dearth of coverage of this issue; with that, advisors and investors have poured into the Guggenheim ETF.

Related Link: Long-Term Investors Should Get To Know This Equal-Weight ETF

Indeed, RSP has rewarded their faith. Proving that fees are not the only thing that matters, RSP has returned 55.3 percent over the past five years, an advantage of 500 basis points over the Vanguard 500 Index FundVOO.

That, despite RSP charging 0.4 percent year (still reasonable among smart beta ETFs) compared to 0.05 percent charged by VOO.

The Small-Stock Factor

Another element to consider is the oft-cited reason for the out-performance of some equal-weight ETFs relative to their cap-weighted peers, which is the small stock factor. Simply put, many market observers would attribute RSP's out-performance of traditional S&P 500 funds to the equal-weight ETF's larger weight to smaller stocks.

In theory, this should make RSP significantly more volatile than a standard S&P 500 fund. In reality, that is not the case, as RSP has been just 30 basis points more volatile than VOO over the past three years, according to ETF Replay data.

RSP's tilt toward smaller stocks helps push the ETF away from a dependence on mega-caps, while lowering the fund's weighted average market cap. The weighted average market cap for the S&P 500 is $132 billion compared to just $38 billion for RSP's index, according to Guggenheim data.

Mega-Cap Dependence Notably Absent

Apple Inc. AAPL illustrates RSP's lack of dependence on mega-caps. The iPad maker is just 0.19 percent of the equal-weight ETF's weight, but more than 3.5 percent of the cap-weighted S&P 500.

Data suggest equal-weight is working in RSP's in significant fashion. Based on rolling monthly periods, RSP has outperformed the traditional S&P 500 62 percent of the time over the past year and 82 percent over the past three years.

Not impressed? Then consider that over the past five years, RSP has topped the S&P 500 in 92 percent of rolling monthly periods and over the past decade that number jumps to 100 percent of the time.

And those races are not all that close. For example, for rolling monthly periods over the past five years, RSP has an average advantage of 161 basis points over the S&P 500. Over the past decade, RSP's average advantage is 158 basis points.