Don’t Celebrate the 2-Year Bull Market Just Yet

The two-year anniversary of the bull market grabbed headlines last week, but it also came as a reminder that not all ETFs are created equal. 

Sure, the S&P 500 keeps hitting all-time highs, up 62% over the past two years. State Street’s SPDR S&P 500 ETF Trust (SPY) is also up an impressive 68% since mid-October 2022 — that’s nearly 3% per month. Good work if you can get it, right? But the stock market can sometimes become a victim of its own success. 

Not From Concentrate

Like the SPY, the Invesco S&P 500 Equal Weight ETF (RSP) has holdings in every company listed on the S&P 500. But unlike the SPY, the RSP is an equal weighted fund — and is up only 46% over the same two-year window. 

That type of underperformance compared to SPY sends a different signal to clients who are expecting to beat traditional indexes. It also demonstrates a rare moment in stock market history where the popular indexes are dominated by a small number of increasingly larger stocks: 

• The S&P 500 has not been this top-heavy since 2000, when the dot-com bubble burst and was followed by three straight years of steadily lower prices. 
• RSP actually outperformed SPY by a margin of 17% to 6% from October 2020 to October 2022, a reminder of just how cyclical the stock market can be. 

Gift Certificate. ETFs can be used as puzzle pieces to help advisors explain the many slices of the stock market to clients. For instance, dividend stocks, small-cap stocks, and non-US stocks underperformed both ETF versions of the S&P 500 the past two years. ETFs also help advisors calm clients’ fear of missing out: They often want to own what they wished they’d owned in the recent past. 

That’s especially timely when headlines are screaming about a two-year bull market anniversary. For advisors, best to skip the cake and balloons, and give clients a much more valuable gift — perspective.