S&P 500 Cap-Weighted vs Equal-Weighted
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.