You Might Be More of an Active Investor Than You Think
- Cap-weighted ETFs are not fully passive. They actively overweight rising stocks and underweight declining ones through constant rebalancing.
- Over the past 10 years, IVV (cap-weighted) significantly outperformed RSP (equal-weight) in both price appreciation and total return.
- IVV delivered a 249.28% 10-year total return versus RSP’s 164.91%.
- While these ETFs show strong performance, investors should maintain diversification and risk management aligned with their personal risk tolerance.
Equal-Weight vs. Cap-Weight ETFs
A topic that does not get enough coverage in my Chart of the Day is exchange-traded funds (ETFs). Some people think of ETFs as totally passive investing, so let’s take a closer look at that premise.
I would agree that if you are investing in an equal-weight ETF, you are making a passive investment decision. But what if you choose to invest in a cap-weighted ETF?
Most active portfolio management algorithms aim for overweight positions in stocks that have rising prices and underweight positions in stocks with sinking prices. That’s exactly how a cap-weighted ETF works, by naturally “rebalancing” throughout each session as prices of each individual fund component rise and fall. And beyond that, most cap-weighted ETFs rebalance every quarter.
Let’s put that thinking to the test and look at a chart of the prices over a 10-year period for two funds:
S&P 500 ETFs Comparison
You can see that over the 10-year period of this chart that IVV’s price rose 197.97% while the price of RSP only rose 126.68%.
But what if we also factored in the reinvestment of dividends for the total return?
iShares S&P 500 Cap Weighted ETF:
- 65.39% 3-year total return
- 120.73% 5-year total return
- 249.28% 10-year total return
Invesco S&P 500 Equal Weighted ETF:
- 37.89% 3-year total return
- 99.% 5-year total return
- 164.91% 10-year total return
The Bottom Line: Cap-Weight Wins
Using these comparisons, I think you’ll agree that the iShares Cap Weighted S&P 500 ETF has a clear advantage over the totally passive, equal-weight ETF RSP.
Today’s Chart of the Day was written by Jim Van Meerten. Read previous editions of the daily newsletter here.
Additional disclosure: The Barchart of the Day highlights stocks that are experiencing exceptional current price appreciation. They are not intended to be buy recommendations as these stocks are extremely volatile and speculative. Should you decide to add one of these stocks to your investment portfolio it is highly suggested you follow a predetermined diversification and moving stop loss discipline that is consistent with your personal investment risk tolerance.
On the date of publication, Jim Van Meerten did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.