The cap-weight S&P 500 has outperformed its equal-weight counterpart by more than 5% over the last three months.

Since the start of this decade, the cap-weight S&P 500 Index has dominated its equal-weight counterpart. The SPDR S&P 500 ETF Trust (SPY) has gained 95.38% while the Invesco S&P 500 Equal Weight ETF (RSP) has gained 60.64%. Other than 2022 when RSP held up much better than SPY, there has been consistent leadership from SPY over RSP. In recent years, a chief concern amongst investors has been a lack of breadth in the US market as a handful of mega cap stocks have routinely accounted for an outsized portion of the return of the S&P 500. Nonetheless, the S&P 500 has chugged higher and higher with investors in smaller names left behind. While there is no sign that this long-term trend is changing, shifting our focus to lesser time frames can give us an indication of when either cap-weight or the equal-weight has gotten ahead of its skis. Looking at the rolling 3-month performance spread between SPY and RSP, SPY has outperformed RSP by over 5%. Historically, even in recent years, this has been a spot where RSP begins to “catch-up” on a relative basis.

Looking at forward returns following SPY outperforming RSP by 5% in a 3-month span, excluding clusters within three months, SPY tends to continue to outperform across most time frames apart from 3-month forward returns which RSP edges out SPY. So, while SPY has been on a very strong run the last three months, that doesn’t spell doom for the cap-weight nor does it mean the equal-weight is poised to materially outperform moving forward. One-year forward returns are strong and consistent for both SPY and RSP, a good sign for domestic equities moving forward.