3 Comments
Feb 6Liked by The Rational Walk

Some would disagree that SPY vs RSP comes down to active vs. passive. SPY is active they say (and I agree).

If we expand our thinking, the choice array is much broader than cap wt companies vs. equal wt. companies. Chris Schindler points out in a recent Resolve Riffs podcast that even though equal wt offers some advantages relative to cap wt, it also has disadvantages (https://investresolve.com/single/resolve-riffs/ beginning about 10 min. mark).

Perhaps the biggest challenge is choosing the units to equal weight Companies are problematic, e.g. consider whether Alphabet is one or many companies (what if govt forces a breakup-what was weighted as 1 company is now multiple). Perhaps better approach is using other units, e.g. fundamental metrics/units as pioneered by Research Affiliates RAFI. Weighting based on a dollar of earnings is simple and efficient, avoids some of the definitional problems of "unit." And, has the benefit of outperforming. (See RA website for definition on various fundamental units, implementation and performance research.)

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Thanks, I will listen to the podcast. Your point on Alphabet of course applies to Berkshire even more so. In RSP, Berkshire gets the 0.2% allocation, but if BNSF was spun off (just for the sake of argument), it would no doubt be included in the S&P 500 and would get a 0.2% allocation in RSP as well. I was more enthusiastic going into my investigation of RSP than I am now.

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Feb 6Liked by The Rational Walk

Meb Faber and others have long argued that any weighting method not based on market cap will avoid the serious problems of cap wts. Research Affiliates, WisdomTree, et al. have ETFs that do this. My favorite metric is shareholder yield - Cambria's SYLD ETF compares very favorably to SPY and IMO is a superior alternative to RSP.

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