RSP and SPY hold the same 500 companies. Over the past decade they have delivered materially different returns, taken different risks and behaved like different asset classes at times. The only difference between them is how much of each company they own.
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The same 500 companies, two very different portfolios
Short answer: A cap-weighted fund owns each company in proportion to its market value, so the largest members dominate. An equal-weighted fund owns roughly the same dollar amount of each, so a company representing 7% of the cap-weighted index and one representing 0.02% carry identical weight. The equal-weighted version is structurally a mid-cap and value tilt applied to a large-cap universe.
Concentration: what the top ten weight looks like
In a cap-weighted S&P 500, the ten largest companies have come to represent an unusually large share of the total — a level of concentration high by the standards of recent decades.
In the equal-weighted version those same ten represent ten times 0.2%, or about 2%. The remaining 98% sits in the other 490 companies. This single difference explains nearly all of the divergence in returns, volatility and sector exposure between the two.
The RSP/SPY ratio as a breadth chart in disguise
Dividing the equal-weighted fund by the cap-weighted one produces a line that rises when the average member outperforms the largest members and falls when the reverse happens.
That is the same information the advance-decline line carries, expressed as a tradeable price series with no construction ambiguity. It is arguably the cleanest breadth indicator available, because it requires no decisions about what counts as an advance or which universe to include.
A falling ratio alongside a rising index means gains are concentrated. A rising ratio means participation is broadening. Neither carries a forecast.
Rebalancing drag, turnover, and the fee difference
Equal weighting is not free, and the costs are frequently understated in comparisons.
Weights drift constantly as prices move, so maintaining equal weight requires periodic rebalancing — typically quarterly — which mechanically sells winners and buys losers. That generates turnover far above a cap-weighted fund, where weights self-adjust and no trading is required. Higher turnover means higher transaction costs and, in taxable accounts, more realised capital gains.
Expense ratios also differ. Equal-weighted products typically charge several times what the largest cap-weighted funds charge. Over long horizons that gap compounds meaningfully against the equal-weighted version.
Periods when equal weight won, and what they had in common
Equal weighting outperformed for extended stretches, notably in the period following the dot-com peak and during parts of the mid-2000s. It underperformed substantially through the decade in which the largest technology companies led the market.
The common feature of the winning periods is straightforward: they were periods when smaller and cheaper companies outperformed larger and more expensive ones. Equal weighting is a systematic tilt toward smaller and cheaper members, so it wins when that tilt wins.
This is worth stating plainly because equal weighting is sometimes presented as a structurally superior approach that avoids concentration risk. It is better described as a factor bet — one that has historically been rewarded over very long horizons and has gone through decade-long periods of underperformance.
Sector tilts you inherit without choosing them
Because sector weights in a cap-weighted index reflect the market value of their members, and because sectors contain different numbers of companies, equal weighting produces substantially different sector exposure.
Sectors with many mid-sized companies — industrials, financials, real estate, utilities — receive higher weight under equal weighting. Sectors dominated by a few very large companies, principally technology, receive much lower weight. An investor choosing equal weight to avoid concentration is simultaneously taking a large underweight in technology and an overweight in industrials and financials, whether or not that was intended.
Mini glossary
- Float-adjusted market capitalisation. Share price multiplied by shares available to public investors.
- Rebalancing. Periodic trading to restore target weights after price drift.
- Factor tilt. Systematic exposure to a characteristic such as size or value.
- Turnover. The proportion of a portfolio traded over a period.
Risks, uncertainty, and limits
Concentration figures change continuously with relative performance. Historical comparisons between the two approaches are highly sensitive to start and end dates, and a decade chosen to favour either version can be found without much effort.
Nothing here recommends either construction. They are different portfolios with different risks built from the same list of companies, and which is appropriate depends on what an investor already owns.