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February 01, 2010 at 02:00 AM
[Editor's Note: This is a longer version of the article which appeared in the print edition of Investment Advisor, Februrary 2010 and includes S&P rankings of the ETFs discussed and some of the stocks they own.]
In January 1993, traders at the struggling American Stock Exchange arrived at work to find a menacing, nine-foot inflatable spider handing from the ceiling. Set up to mark the first day of trading in State Street’s Standard & Poor’s Depositary Receipts (SPDRs), a new type of security tracking the S&P 500 that had characteristics of both mutual funds and exchange-listed stocks, the spider was an ominous sight: four years earlier, the Amex had tried to launch a similar product called Index Participation Shares that drew little interest from Wall Street, and left the exchange playing catch-up to its rivals, the much larger New York Stock Exchange and the rapidly growing Nasdaq.
This time, however, the timing was right, and the new listing was an instant success, breathing new life into the Amex for years to come. Later renamed the SPDR S&P 500 Fund (SPY, $113, Overweight–see The Rankings Explained sidebar), this exchange traded fund now has more $85 billion in assets, making it by far the largest ETF in the world. As might be expected, a number of competitors to the SPDR have sprung up hoping to cash in on that success. While some, such as the iShares S&P 500 Index Fund (IVV $113 Overweight), are virtually identical to the SPDR fund, a handful of other ETFs offers more substantial modifications to the original formula. Some tinker with the weightings of the index itself, while others add an options-based strategy to the index holdings, short sales, and elements of active management to enhance performance.
How They Are Similar; How They Differ
Like the S&P 500 index itself, the SPDR and iShares funds use market capitalization to determine the relative weights of each individual stock in the index. Currently, ExxonMobil (XOM, $69, *****) is the largest company in the index, representing about 3.4% of the index’s total capitalization. Information technology is the largest sector, accounting for almost 20% of the total.
Rydex markets the S&P Equal Weight ETF (RSP, $40, Marketweight), which, as its name suggests, gives each S&P 500 Index member an equal, 0.2% weighting, thereby “eliminating the bias towards large companies,” in Rydex’s own words. (The ten largest components of the S&P 500 have a combined 20% weighting in the market cap weighted index but just 2% of an equal weight index.) Equal weighting the components changes the fund’s sector exposure, raising consumer discretionary to almost 16% compared with about 9% for a market-cap weighted fund, and lowering information technology to about 15%. The Rydex ETF has $1.8 billion in assets though it has a much higher expense ratio–0.4%–than the SPDR or iShares funds, which charge 0.0945% and 0.09%, respectively.
RevenueShares employs a slightly different approach, with its Large Cap ETF (RWL, $21, Marketweight) weighting the same S&P 500 index components by annual trailing revenue instead of market capitalization. In its version, Wal-Mart (WMT, $54, *****) is the largest component of the fund, at 4.73% of the total, though it doesn’t even crack the top 10 in the market capitalization-weighted index. This ETF’s top 10 excludes Microsoft (MSFT, $31, ***), currently the second largest component by market cap, as well as No. 3 Apple Computer (AAPL, $214, ****), No. 4 Johnson & Johnson (JNJ, $65, ****), and No. 5 Procter & Gamble (PG, $61, ****). It has about $100 million in assets and charges a 0.49% expense ratio.
