Today we review the RSP vs SPY RS switching strategy.
Portfolio View - Major Market ETFs
| Symbol | Name | Price | Yield | PnF Trend | RS Signal | RS Col. | Fund Score | 200 Day MA | Weekly Mom |
|---|---|---|---|---|---|---|---|---|---|
| DIA | SPDR Dow Jones Industrial Average ETF Trust | 318.61 | 1.78 | Positive | O | 3.14 | 285.60 | +2W | |
| EEM | iShares MSCI Emerging Markets ETF | 53.53 | 1.40 | Positive | Sell | O | 4.13 | 47.19 | -4W |
| EFA | iShares MSCI EAFE ETF | 75.37 | 2.10 | Positive | Sell | O | 3.10 | 67.51 | -12W |
| FM | iShares MSCI Frontier and Select EM ETF | 29.37 | 2.80 | Positive | Sell | O | 1.43 | 26.49 | -5W |
| IJH | iShares S&P MidCap 400 Index Fund | 254.50 | 1.18 | Positive | Buy | O | 4.29 | 206.77 | -7W |
| IJR | iShares S&P SmallCap 600 Index Fund | 110.17 | 0.97 | Positive | Buy | X | 4.64 | 81.55 | -5W |
| QQQ | Invesco QQQ Trust | 311.77 | 0.55 | Positive | Buy | X | 4.05 | 285.30 | -3W |
| RSP | Invesco S&P 500 Equal Weight ETF | 138.17 | 1.56 | Positive | Buy | X | 5.60 | 116.42 | +2W |
| SPY | SPDR S&P 500 ETF Trust | 387.17 | 1.50 | Positive | O | 2.99 | 347.39 | -3W | |
| XLG | Invesco S&P 500 Top 50 ETF | 290.71 | 1.24 | Positive | O | 3.29 | 266.82 | -3W |
Additional Comments:
Over the past week of market action (3/2 – 3/9), seven of the major market funds listed in the table above finished in the black while three finished in the red. The best performing fund was the iShares S&P SmallCap 600 Index Fund IJR, up 3.49% while the Invesco QQQ Trust QQQ lagged the group with a loss of -2.08%. The IJR continues to lead the pack in terms of year-to-date performance with an impressive gain of 19.88%. In fact, with today’s market action, the IJR has printed a fresh all-time high at the $112 level, extending the small-cap proxy’s year-to-date gains even further. The S&P 500 Index, as represented by the SPDR S&P 500 ETF Trust SPY, has managed a year-to-date return of 3.55%, which is actually 4.78% less than the YTD return for the Invesco S&P 500 Equal Weight ETF RSP. Recall that these two ETFs own the exact same 500+ stocks, but RSP holds them in an equally weighted fashion as opposed to the traditional cap-weighting that is employed within the SPY. So, what is causing this difference in performance? Sector exposure between the two funds has been a significant factor as the spread between the two S&P 500 index funds can be largely attributed to consumer discretionary, which has contributed 1.50% to the RSP while it contributed just 0.04% to the SPY since December 31. Similarly, the energy sector has added 1.65% to the RSP while it has contributed just 0.85% to the SPY (Source: Bloomberg). Regardless of the reason(s) behind the performance dispersion so far this year, this week the spread between the two S&P 500 funds became significant enough to cause a column change on the RS chart of RSP vs SPY, favoring equal-weight exposure for the first time in a year.
Below is a snapshot of the 3.25% relative strength (RS) chart between the equal-weight S&P 500 ETF RSP and the cap-weight S&P 500 ETF SPY. Using this single RS chart, we run an RS switching strategy between the RSP and SPY. When this chart is in a column of Xs (highlighted in pink), it suggests positive RS for equal weight exposure through RSP and therefore, the strategy owns RSP. When the chart is in a column of Os (highlighted in blue), it suggests cap-weighted exposure through SPY is likely to outperform, and the strategy will rotate out of the RSP and into the SPY. To create this RS chart yourself, simply pull up RSP’s trend chart and click on the blue “Chart” button under SmartChart on the left-hand side of the page. You will automatically be redirected to the SmartChart tool. From here, click the RS Chart dropdown and type “SPY” into the Compare to box, “3.25” into the Scale box, and “35” into the Years box. As mentioned above, this RS chart moved into a column of X's after Monday’s trading session so the RS switching strategy has rotated out of the SPY and into the RSP and will remain so until the chart reverses down into Os. A few observations from the graphic below:
- From 12/31/1994 – 3/8/2021, the RSP has been favored over the SPY on a relative strength basis for about 74% of the time.
- In the last 30+ years, only two of the column changes failed to produce outperformance in the RS switching strategy, which also happened to be the two shortest-lived signals, speaking to the adaptive nature of relative strength. The most recently completed signal that was in place between March 2, 2020, and March 8, 2021, marked the second failed signal. The margin of outperformance of RSP over SPY was just under 5%.
- On a cumulative basis, the RSP has outperformed the SPY by just over 277%; however, if you would have employed an RS switching strategy using the RS chart below, you could have greatly improved performance over buying and holding either ETF on their own. Through March 8, the strategy is up 1,227.78% since 12/31/1994 (see graphic above).
- Because of the column reversal into Xs on March 8, 2021, the RS switching strategy is now fully invested in the RSP and will remain so until the RS relationship reverses down into a column of Os.
