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Cap-weighted ETFs are not fully passive. They actively overweight rising stocks and underweight declining ones through constant rebalancing.
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Over the past 10 years, IVV (cap-weighted) significantly outperformed RSP (equal-weight) in both price appreciation and total return.
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IVV delivered a 249.28% 10-year total return versus RSP’s 164.91%.
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While these ETFs show strong performance, investors should maintain diversification and risk management aligned with their personal risk tolerance.
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:
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:
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65.39% 3-year total return
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120.73% 5-year total return
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249.28% 10-year total return
Invesco S&P 500 Equal Weighted ETF:
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.
