S&P 500 Cap-Weighted vs Equal-Weighted

Liz Whitteberry |

The S&P 500 is up year-to-date.  If you look closer, though, it's a few very large companies (mega-caps) that are up year to date.  

Consider two exchange-traded funds that track the S&P 500 index, SPY and RSP.

SPY invests in the companies in the S&P 500 on a market-capitalization basis.  If a company represents 5% of the S&P 500, then 5% of the fund is invested in that company.

RSP invests in the companies in the S&P 500 on an equal-weighted basis.  If there are 500 companies to invest in, then 1/500th of the fund is invested in each company.

The following chart compares their performance through mid-May:



The market-cap weighted SPY was up 8.3%, whereas the equal-weighted RSP was up 0.6%. 

Mega-cap stocks, such as NVIDIA, Apple, Amazon, Alphabet, Microsoft, and Meta, have outperformed the rest of the market.  Because these companies are included in the SPY based on their market-capitalization, they make up a much greater percentage of the fund.  They have therefore caused SPY to outperform RSP by nearly 8% through mid-May.  

This trend could continue for some time due to AI/big tech. However, history tells us the equal-weighted RSP should catch up when the broader market takes off.  This is something to watch.