The SPDR S&P 500 ETF Trust Is on a Roll But Better Options Exist 

  • The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 4.4% in the last month and getting closer to positive 2022 returns 
  • If investors hope to make money in 2022, SPY stock has got to get going
  • If you’re thinking of buying SPY, it pays to figure out who’s delivering the returns 
Man standing behind a Wall Street chart with S&P 500 on top of it. SPY stock.
Source: Funtap / Shutterstock

Over the past month through March 29, SPY stock is up 4.4%. Year-to-date, it’s down 4.0% but looking far more alive than it has for some time.

I must admit I don’t spend much time worrying about whether the S&P 500 is up or down on a given day or week. Instead, I tend to look at the bigger picture. However, recently, I knew the index was on a roll because my wife told me her portfolio was looking a lot healthier than when she looked at it a few weeks earlier. 

As Warren Buffett likes to say, a low-cost S&P 500 ETF or mutual fund is the way to go for most retail investors. Over the long haul, no ETF has proven to deliver better risk-adjusted returns than SPY. 

With the index on a roll, it’s tempting to want to take some of your cash and buy a little more SPY. But, before you do, it pays to consider how the index is getting its latest returns. 

Is it an overall performance by all 505 stocks? Or the outsized returns of a few?

I’ll consider both possibilities.

SPY SPDR S&P 500 ETF Trust $457.23

SPY Stock Is Getting Production From Everywhere

According to Barchart.com, there are 339 components of the index with positive returns over the past month. That’s a 61% success rate. So, there’s evidence the rally’s been across the board. 

Remember, the SPY is a market-cap-weighted index, which means the larger the market capitalization, the larger the weighting. So, Apple (NASDAQ:AAPL) has the largest weighting in SPY at 7.04%. On March 28, it finished the day in positive territory for a 10th consecutive day, a feat it last achieved in October 2010. 

As far as I can tell, Apple’s 6.04% return over the past month puts it around 150th out of 505. So, Apple’s contributed approximately 0.43% (6.04% x 7.04%) of the ETF’s 4.4% return over the past month. That’s not insignificant.

Who else in the top 10 has kicked butt over the past month?

Microsoft (NASDAQ:MSFT), the second-largest holding, doesn’t make the top 100. Amazon (NASDAQ:AMZN) is the third-largest component at 3.82%. It’s up 8.61% in the past month, contributing 0.33% of SPY’s gains. 

The other top 10 holdings delivering outsized returns in the past month include Tesla (NASDAQ:TSLA), Nvidia (NASDAQ:NVDA) and Berkshire Hathaway (NYSE:BRK.A, BRK.B).

Therefore, while SPY has gotten positive returns from 72% of the index’s components, it’s still clear that the biggest market caps contribute a decent share of the returns.

Only an Equal Weighted Version Can Spread the Joy Around

The Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) is the equal-weight version of the index. It’s up 2.9% over the past month, 150 basis points less than SPY. 

Why is that? 

Because it rebalances four times a year to ensure that all 505 components have the same 0.20% weight at the beginning of the quarter. Invesco provides a fact sheet for RSP that shows that the top 100 companies in the S&P 500 account for 70% of the index, while the top 100 companies in the S&P 500 Equal Weight Index account for just 20%. 

Therefore, the smaller companies in the S&P 500 have minimal effect on the overall performance of the index. So, when the index moves as it has in the past month, it’s because of the top 100 companies. 

Invesco’s fact sheet also points out that the equal-weight version over the past 10 years outperformed the cap-weighted version on rolling monthly periods 77% of the time. Since RSP’s launch in April 2003 through Dec. 31, 2021, the equal-weighted index outperformed the cap-weighted index by 117 basis points. 

If you genuinely want to own 500 of America’s largest companies, RSP is the better way to do that than SPY. 

SPY remains an ETF driven by the top 10 holdings. It goes when they go, as we’ve seen in the past month.

Tesla’s in the Driver’s Seat

Tesla represents 2.36% of SPY. In the past month, it’s up 23.98%. That means it’s accounted for 0.57% (23.98% x 2.36%) of the S&P 500’s return. Apple and Tesla alone account for approximately 25% of the index’s performance in the past month. 

You might feel like you’re getting diversification with the SPY, but you’re not. 

A possible option is to put 50% into RSP and then 50% into an equal-weighted portfolio of stocks from SPY’s top 10 holdings. It doesn’t seem very easy, but it is. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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