RSP Vs SPY: The Critical Differences of the Two ETFs Analyzed

This post can be a useful part of your research if you’re comparing two ETFs, RSP Vs SPY. It’s another excellent post from Marjolein at Radical Fire, I hope you enjoy it. Tim

Investing your hard-earned money may be the best way to reach your financial goals. But investing can be very tricky and challenging.

Want to know RSP vs. SPY as the two investment assets you may consider for your portfolio. Read up on them now and learn if this is the right fit for you.

Investing your money is a no-brainer when determining how you would achieve your financial plans. You can ask anyone how they grow their money, and for sure, they would include investments in their methods.

But along with investments, there comes the need to understand what kind of assets and products will help you in your financial journey. 

As there are a lot of investment opportunities available now, how do you know which one will suit your portfolio? In your conduct of due diligence, let’s discuss two options that you may consider.

Let’s learn about two widely used and traded funds by investors nowadays – RSP vs. SPY.

RSP Vs SPY – Overview

There are reasons why Exchange-Traded Funds (ETFs) are more popular than mutual funds. One of these is that ETFs are more readily available than mutual funds because mutual funds are only available through the issuing stock brokerage.

ETFs also contain all the 500 companies that make the S&P 500 and are usually weighted by their market cap.

This means that large companies have a bigger impact on the price of the shares. However, ETFs have a downside in that they can only be bought as whole shares. That means if an ETF costs $80, you will need to invest in an increment of $80. 

The SPDR S&P 500 ETF Trust (SPY) and Invesco S&P 500 Equal Weight ETF (RSP) are two of the most popular funds.

While both of them have S&P in their names, they have many similarities and differences. Let’s compare and contrast the two ETFs.

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RSP: Invesco S&P 500 Equal Weight ETF

The Invesco S&P 500 Equal Weight ETF or RSP is one of the most popular ETFs. The fund seeks to copy the performance of the S&P 500 index.

The management style of the fund is passive when tracking the performance of the underlying index. It takes all the stocks of the S&P 500 and weighs them equally.

The footprint of the smaller midcap S&P 500 is greatly increased when they are weighted equally. This improves the beta for the portfolio.

It also reduces concentration, ensuring that the blowup risk from a single stock is minimized. Even though there may be some sector biases, RSP doesn’t equal-weight sectors like the case with other similar ETFs.

While RSP is linked to the S&P 500 index, it has a unique weighting method that makes it useful for some people but impractical for other traders.

Like it’s the case with the majority of products from Rydex, RSP follows an equal-weighted index. This means that all companies get an equal allocation. 

This may lead to a more balanced exposure as compared to SPY. Some investors also believe that this methodology will increase the value in the long term.

However, this unique exposure also comes at a high expense ratio. The ETF is therefore considered to be more expensive and less liquid as compared to SPY. But like most ETFs, it’s still very cost-effective.

SPY: SPDR S&P 500 ETF Trust

The SPDR S&P 500 ETF Trust is a fund that is traded in the exchange using the NYSE Arca name SPY. The SPDR acronym stands for the Standard and Poor Depository Receipt.

The fund is the biggest ETF in the world and tracks the S&P 500. The fund is sponsored by SPDR Services LC, a subsidiary of the American Stock Exchange LLC.

The fund distributes dividends every quarter depending on the accumulated stock dividends that are held in trustless expenses.

SPY appeals more to investors whose aim is to build a long-term portfolio that includes large-capitalization US stocks. However, the fund is also gaining popularity among active traders as it enables them to balance safe and risky assets.

[Related read: Large Cap vs. Mid Cap vs. Small Cap Assets – What’s Right For You?]

RSP Vs. SPY: Key Differences

RSP has the aim of tracking the S&P 500 Equal Weighted Average. Since it’s an equal weight average, it invests a similar amount of money in all the stocks that comprise the index. 

The S&P 500 investment of SPY depends on the stock’s market capitalization. Therefore, they put more weight on companies that have a large market capitalization.

RSP Vs. SPY: Composition Differences

Both RSP and SPY are US Stocks large blend funds. This means they both invest in almost the same investment.

However, as the weighting is different, the top 10 holdings in RSP are 2.47% of the fund, while the top 10 holdings in SPY consist of 26.78% of the fund.

Since equal weight is allocated to RSP, technology stocks take up 14.94% of the fund. On the other hand, SPY is dominated by information technology stocks, taking up to 27.05%. 

The allocation for each sector is as follows:

Sector SPYRSP
IT27.05%14.94%
Industrials8.43%14.51%
Financials11.01%13.04%
Health Care13.67%12.74%
Consumer Discretionary12.87%11.75%
Real Estate2.34%6.11%
Utilities2.71%5.69%
Materials2.74%5.59%
Energy2.68%4.88%
Communication Services2.34%4.38%

The top 10 holdings in the companies are as follows:

SPYRSP
Apple: 6.44%Tesla: 0.26%
Microsoft: 5.03%SVB Financial Group: 0.25%
Amazon: 4.17%AES Corp: 0.25%
Tesla: 2.00%Albemarle: 0.25%
Facebook Class A: 1.84%Alexion Pharmaceutical: 0.25%
Alphabet Class A: 1.63%Mosaic: 0.25%
Alphabet Class C: 1.58%Flir Systems: 0.24%
Berkshire Hathaway: 1.43%Abiomed: 0.24%
JP Morgan Chase & Co: 1.34%Viacom CBS: 0.24%
Johnson & Johnson: 1.32%Goldman Sachs Group: 0.24%

RSP Vs. SPY: Performance Differences

When it comes to the annual returns, RSP had a negative return on several occasions. Some of the years were in 2000, 2011, 2015, and 2018. In two of those years, SPY also had a negative return.

When there is a down market, RSP has a poorer performance. This is an indication that SPY is less volatile as compared to RSP.

Here is a table of the annualized returns of the two funds. 

SPYRSP
1 year18.37%12.19%
5 years15.11%12.59%
10 years13.76%12.22%
Lifetime9.55%9.74%

From this table, it’s clear that in the last 16 years, RPS has had better returns. But in the previous 10, 5 and one year period, SPY had a better performance.

RSP Vs. SPY: Fees

Higher fees can kill your portfolio. So, which of the two funds has higher fees? At 0.20%, the expense ratio of RSP is higher than that of SPY, which is 0.09%.

That means for every investment of $10,000, RSP investors are charged $20 a year. On the other hand, SPY investors are charged $9 a year.

Regarding dividends, RSP has a dividend yield of 1.35%, and SPY has a dividend yield of 1.5%. Therefore, SPY is more attractive for dividend investors. Finally, the Assets Under Management (AUM) of RSP is 31.17 B compared to SPY’s 464.3 B.

RSP Vs. SPY: Fund size

When we consider the number of assets under their management, you can see that SPY is bigger with 464.3 billion AUM compared to RSP with 31.17 billion AUM. 

Both funds are categorized as large funds. While this isn’t a sign of how good or bad a fund is, it indicates the amount of confidence in the fund.

RSP Vs. SPY: Why Bigger Isn’t Always Better

In a long-term investment portfolio, mid-caps can easily outperform large-cap stocks.

This is because the mid-cap stocks are often a combination of the smaller companies with growth potential with the financial stabilities of the large companies. Therefore, they enable investors to enjoy the best of both worlds. 

Due to the growth in earnings, mid-cap stocks have continued to generate consistent performance in rolling periods compared to the small and large caps. 

By considering historical data from January 1996 to July 2021, mid-cap companies have a growth in earnings of 6.36%.   Large-cap companies had a growth in earnings of 5.24%, and the small caps had a growth cap of 0.88%. 

That historical data shows that there is a chance that mid-caps will provide more attractive opportunities than the large caps in the future. On the other hand, the smaller-sized companies perform better during an economic recovery.

RSP Vs. SPY: Which One Is Better?

Based on the past performances, people who invested in 2004 have gotten a better return on investment from RSP, albeit by a small margin. In the last 10 years, SPY has been performing better. But which of these two funds will perform better in the future?

SPY is highly weighted towards the big companies. These large companies are limited on how much they can grow. After the maturity of a company, its growth becomes limited. This is an indication that RSP is more suitable for investors who need growth.

When investing in RSP, one of the key things you need to consider is volatility. RSP is usually more volatile during a down market.

This is because there is less stability that the bigger companies provide. Therefore, the choice that you make will depend on your investment strategy.

If you prefer more growth, you may want to go with RSP. Otherwise, you may want to stay with SPY and pay a lower fee.

Since both funds are considered to be US Stocks Large Blend Funds, we advise that you invest in one but not both. You should, however, bear in mind that the past performance isn’t a guarantee of the results in the future.

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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

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Tim Thomas has investments in real estate.

Tim Thomas has no positions in the stocks, ETFs or commodities mentioned.

This post originally appeared on Radical Fire and has been syndicated by Tim Thomas / Timothy Thomas Limited.

Featured image credit: Shutterstock

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