Some people think of ETFs as totally passive investing. But let’s take a closer look at that premise – using the iShares Core S&P 500 ETF (IVV) and the Invesco S&P 500 Equal Weight ETF (RSP) as examples, highlights Jim Van Meerten, analyst at Barchart.
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: IVV and RSP.
You can see that over the 10-year period of this chart, IVV’s price rose 197.9% while the price of RSP only rose 126.6%. What if we also factored in the reinvestment of dividends for the total return?
iShares S&P 500 Cap Weighted ETF:
- 65.3% 3-year total return
- 120.7% 5-year total return
- 249.2% 10-year total return
Invesco S&P 500 Equal Weighted ETF:
- 37.8% 3-year total return
- 99% 5-year total return
- 164.9% 10-year total return
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.
