Cherry Picks: Why the Equal-Weight S&P 500 Is Beating the Market-Cap Index
Cherry Picks: Why the Equal-Weight S&P 500 Is Beating the Market-Cap Index
By:Tom Preston
The lackluster performance of the Mag 7 stocks recently has had more investors looking into equal-weighted indices. An equal-weighted index gives each stock the same impact on the index’s performance, with the aim of reducing the influence of the bigger cap stocks. A capitalization-weighted index gives bigger cap stocks more weight and smaller cap stocks less weight. That’s problem that the mega-cap Mag 7 stocks have on the standard S&P 500 index and the SPY. The hope is that an equal-weighted index on those same 500 stocks might have lower volatility and better performance than the capitalization-weighted index.
The biggest equal-weight ETF is the Invesco S&P 500 RSP. RSP had a record month of investment inflows in February, which means more investors are placing bets on it. Over the past six months, the RSP has caught up to and surpassed the returns of SPY.
The reason why RSP has beaten SPY recently is the underperformance of the Mag 7 stocks.
Only until the past 18 months has SPY IV been consistently higher than RSP IV. That, too, coincides with the increase in IV of the Mag 7 stocks.
Drilling down into current IV data, SPY IV is about 24% higher than RSP IV. But is that all due to the Mag 7 stocks?
This shows that the smaller cap stocks would still contribute more volatility to an index than the larger cap stocks, while both contribute more than the middle 400.
While RSP might be less volatile and currently have better returns than SPY, there’s no guarantee that will continue. And given RSP’s options aren’t nearly as liquid as SPY’s, option traders are better served using SPY.
TRADE IDEA
SPY Short 672/674 put spread April ’26 exp with 45 DTE .60 credit
The war with Iran has sent shockwaves through the markets and sent volatility higher. The drop in SPY’s price recently has pushed its IV rank over 32%. If you think that SPY’s sell-off is overdone given the hopefully short-term projections for the war, and that it might either rebound or not fall too much further over the next few weeks, the short 672/674 put vertical in the April expiration with 45 DTE is a bullish strategy that collects a credit 1/3 the width of its strikes, has an 84% probability of making 50% of its $60 max potential profit before expiry vs its $140 max potential risk, and that generates $.20 of positive daily theta.
Tom Preston, tastylive chief market strategist, is responsible for the brokerage’s trading strategy, client-facing trading software and futures trading products. He writes tastylive's Cherry Bomb newsletter. He's been trading options since 1992. For live daily programming, market news and commentary, visit or the YouTube channel. Trade with a better broker, today. tastylive Inc. and tastytrade Inc. are separate but affiliated companies.
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