ETF Comparison: SPDR S&P 500 ETF Trust (SPY) Versus Invesco S&P 500 Equal Weight ETF (RSP)

SPY vs RSP: Total cost of ownership

When it comes to total cost of ownership, SPY clearly leads. With an expense ratio of just 0.0945%, it's significantly more affordable than RSP, which charges 0.2%.

This higher fee for RSP can be attributed to its utilization of a more specialized index and the increased transaction costs associated with the frequent rebalancing necessary for maintaining equal weights.

In terms of trading costs, SPY also takes the lead due to its status as one of the largest and most liquid ETFs in the market, boasting a remarkably low 30-day median bid-ask spread of just 0.003%. While RSP's spread of 0.009% is still low, it doesn't quite match SPY's efficiency in this area.

Combining these factors, SPY emerges as the more cost-effective choice overall. However, it's worth noting that even SPY's low fees are outdone by certain S&P 500 ETFs from Vanguard and iShares, which have expense ratios as low as 0.03%.

SPY vs RSP: Methodology and holdings

The benchmark index is the critical point of divergence between SPY and RSP. Although both ETFs hold the same stocks, the methods they use for weighting these stocks are fundamentally different.

SPY

straightforwardly tracks the S&P 500 Index, a market-cap-weighted benchmark consisting of 500 U.S. companies. These companies are selected by a committee that screens for liquidity, size, prominence, and positive earnings.

RSP

, on the other hand, also adheres to the same S&P 500 selection criteria but diverges significantly in its weighting approach. Each of the 500 stocks is assigned an equal weight upon each rebalance. This means that while a company like Apple might command a weight of 6.92% in SPY, in RSP, it would consistently hold just 0.2%.

This equal weighting scheme results in marked differences in sector exposure. SPY has a significant overweight in the information technology sector due to the high market cap of companies within that sector. In contrast, RSP offers a more balanced sector distribution, with greater emphasis on industrials and financials and a comparatively modest tech presence.

RSP is also much less top-heavy. Its top 10 holdings constitute only 4.18% of the ETF, compared to SPY's 40.35%, making RSP a potentially more appealing option for those seeking broader exposure across mid-caps alongside large and mega-caps.

SPY vs RSP: Risk and return

In recent years, SPY

has indeed outperformed RSP

RSP

-0.33%

, which isn't surprising given the heavy weighting of the "Magnificent Seven" stocks prominently in its top holdings.

Despite this performance, SPY has experienced net outflows year to date, while RSP has seen steady growth. This trend may indicate a shift among some investors towards diversifying away from mega-caps.

Looking at a longer time frame, from April 2003 to the present, RSP has actually outperformed SPY despite its higher turnover and expense ratio, with a compound annual growth rate (CAGR) of 11.06% compared to SPY's 10.82%.

However, RSP exhibits a lower risk-adjusted return, with a Sharpe ratio of 0.45 versus SPY's 0.47. RSP's overweight to mid-caps introduces a size factor, which can boost returns but also increases risk.

As for risk metrics, both ETFs exhibit similar historical volatility, but RSP has endured deeper and longer drawdowns. This might be attributed to its equal weighting approach, which can lead to higher exposure to sectors and stocks that are more volatile or less established compared to the large-cap dominated SPY.

I have mixed feelings about these ETFs. SPY remains a supreme trading tool due to its unmatched liquidity and options market, making it ideal for tactical plays. However, its concentration in mega-caps and sector biases, particularly towards technology, can be concerning.

On the other hand, RSP offers a historically effective way to capture the S&P 500's constituents in a more balanced manner. Yet, the higher turnover and expense ratio of RSP might dampen its appeal somewhat, making it less suitable for those looking for a cost-efficient core holding.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.