Why Hold This instead of That?

I am frequently asked by clients about the Exchange Traded Funds (ETF’s) we use in our portfolio construction. In particular, some clients ask why we hold RSP for broad market exposure instead of the more-well-known SPY. I’d like to explain the difference between the two and why we would use one over the other.


SPY is the first and most well know ETF in U.S. markets. Commonly known as the Spider (SPDR) it was introduced in January, 1993. It corresponds to price movement in the S&P 500. As such, it is a cap-weighted index, meaning that the larger a company is the more weighting or exposure the company has in the index or ETF.

RSP, on the other hand, mirrors the same S&P 500 index but for one major difference; RSP is an equal-dollar-weighted ETF. This means that regardless of the size of a company, each one has an equal weighting in the ETF. In other words: one company, one vote.

When comparing these two ETF’s we look at their relative strength. How do their prices move in relation to each other?

Going back to 1994, if you were to buy and hold SPY you would have a gain of 208.58% not including dividends. If you had bought RSP, your gain would have been 313.85% without dividends. What’s more interesting is, if you followed the relative strength indicators for each of these ETF’s going back 18 years, and made the changes that the indicator recommended, your return would have been over 400%.

As we all know, past performance is no guarantee for future success. However, I feel it is important to pay attention to what the market is telling us and make prudent investment decisions. Following the relative strength indicators over time can help us do just that.

Source: Dorsey Wright & Associates, Inc.