Same Stocks, Different Story

If I told you I had two baskets of stocks, but that both baskets contained the same stocks, you might immediately assume that both baskets have performed the same. I mean, after all, they are the same stocks, right?

But while the two baskets might hold the same names, it’s the weighting of the names in the two baskets that would account for their relative outperformance. Allow me to use a real example here to illustrate this point, and for this I am going to rely heavily on the charts.

First, the same stocks here are those in the S&P 500 Index. The benchmark measure of the domestic equity market is the one most market pundits like me use when we refer broadly to “the market.”

If we use a market-cap-weighted basket of stocks in the S&P 500, such as the SPDR S&P 500 ETF (SPY), then we get a different performance value from that of the equal-weighted basket of the stocks in the S&P 500, such as the Invesco S&P 500 Equal Weight ETF (RSP).

While both exchange-traded funds (ETFs) own the same 500 companies, in the case of SPY, they aren’t all owned in equal amounts. Because stocks with higher market capitalizations are held in higher percentages based on that market capitalization, you get outsized exposure to the biggest stocks in the S&P 500 with SPY.

Which stocks are these? Well, see if these five names sound familiar: Apple (AAPL), 7.39%, Nvidia (NVDA), 6.14%, Microsoft (MSFT), 5.85%, Amazon.com (AMZN), Meta Platforms (META), 2.84%.

Let’s take a quick look at the chart below of SPY over the past 12 months.

Chart courtesy of StockCharts.com.

As you can see, the bull has been stampeding here, despite the recent pullback below the 50-day moving average (blue line).

Now let’s look at the chart of the equal-weight S&P 500, RSP.

Chart courtesy of StockCharts.com.

As you can see here, this chart has actually been more volatile over the past year; however, of late, RSP has actually outperformed SPY. In fact, year to date, SPY has posted a total return of 1.39%. But that gain is about half of the gain that RSP has posted year to date of 2.81%.

The chart below shows that divergence so far in the first two months of 2025.

Now, this is only a couple of months, so it’s not quite appropriate to make a call that there is somehow a changing of the guard taking place. After all, if we go out to 12 months, SPY is up 18.5% versus RSP at 13%. Go out further to three years and that outperformance of SPY really shows, as it is up 41.9% while RSP is up just 22.2%.

However, the recent outperformance of RSP is how a material change in market character starts out, and it is something I’ll be watching closely as the year unfolds. Because if the market is making a transition from mega-cap-tech outperformance to broad-market outperformance, that is a tradable trend you will want to take advantage of as an individual investor.

But how best do you do this? Well, that’s what I can help you do in my newsletter advisory service, Investing Edge, where we currently recommend a tactical allocation to the aformentioned RSP.

If you want to see how we use fundamental, technical and macro analysis to give your money the alpha edge it needs to fund the life you want, then I invite you to check out Jim Woods’ Investing Edge today!

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Medicine Hat  

There will be levels on high hills that appraise
There will be unchanging certainties
Barometers that follow the stampede
There will be right, there will be wrong
Drop of the hat, and it’s already started
Just like that, and the deed is done
What I’d give for that hat to be medicine
The time is now to be on the run

–Son Volt, “Medicine Hat”

Change is all around us, there is no debating that. But will that change be virtuous, or will it be nefarious? Well, like all things in life, it’s probably going to contain both the bitter and the sweet because that’s the flavor of reality. And while we all wish any change would be a kind of “medicine hat” that can deliver us a magical solution to difficult situations, we all know that no such medicine hat actually exits.

The way I see it, the very best we can do, which is well within our grasps, is to “be on the run” in search of the answers that make our lives better and that make our trips around the sun meaningful. And hey, maybe that’s the very best medicine hat we can ever wear, so let’s wear it proudly.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods