Broad Sector Dispersion Highlights Advisors’ Need to Know What to Own as Well as How to Own it

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If you’re following our Nasdaq Dorsey Wright commentaries here, you’ll notice that we have been discussing the factors driving the wide performance dispersion between some top-performing broad market funds, namely, the Invesco QQQ Trust (QQQ) and the Invesco S&P 500 Top 50 ETF (XLG), including the superior strength of large-cap growth stocks relative to their large-cap value counterparts. Today, we want to bring your attention to another year-to-date performance dispersion that caught our eye – the +8% spread between that of the cap-weighted SPDR S&P 500 ETF Trust (SPY) and the equal-weighted Invesco S&P 500 Equal Weight ETF (RSP).

While the SPY and RSP provide exposure to the same basket of 500 stocks, the way in which each provides exposure is what sets them apart. The SPY is a cap-weighted fund, meaning the larger the stock's market cap, the higher the weighting in the Fund. Conversely, the RSP gives all stocks the exact same weighting with no regard for market cap. When we drill down into the sector weightings for each of these two S&P 500-based funds, we find that there are significant differences in sector weightings between the SPY and the RSP, which we've broken down in the table below. Notice how the SPY is most heavily allocated to the technology sector at 27.24%, which is nearly 2x greater than the RSP’s 14.38% weighting. This spread of +12.86% is the largest sector weighting difference between the two funds and is one that has greatly benefitted the SPY as technology (XLK) is the top-performing SPDR sector fund so far this year, up 14.14%. On the other hand, the RSP is most heavily allocated to industrials at 14.51%, a weighting that nearly doubles that of the SPY’s, making it the second-largest single sector weighting difference between the two funds. RSP’s aforementioned overweight to the industrials sector has caused a significant drag on the Fund as industrials, as represented by the Industrials Select Sector SPDR (XLI) is one of the worst-performing sectors so far in 2020, down -15.24%. That said, SPY’s relatively low weighting toward Industrials at 7.94% has shielded the cap-weighted fund from taking a bigger hit in performance. The second-best performing sector fund on a year-to-date basis is communication services, a high-RS sector that the SPY has a 10.95% allocation towards versus the RSP’s 4.44% weighting. Once again, this single sector overweight is the third-largest and has helped the SPY outperform so far this year as the Communication Services Select Sector SPDR (XLC) is up 4.25% year-to-date. As we often mention throughout our research, it is important to not only know what you own (S&P 500 stocks) but how you own it (cap versus equal weight). Additionally, in the case of the SPY, we often find that outperformance is not just about what is owned or overweighted, such as technology and communication services, but is also about what is not owned or underweighted, like industrials and financials.

All performance information is as of 6/23/2020 and does not include dividends or all potential transaction costs. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

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Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Unless otherwise stated, the performance information included in this article does not include all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

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Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset, or strategy.

© Nasdaq Dorsey Wright

© Nasdaq Dorsey Wright

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