Those who were smart, prescient, and lucky enough determined that March 9, 2009, was the absolute bottom of the stock-market debacle during the financial crisis. At that point there was panic everywhere. Nobody was buying anything. Sellers liquidated into a freefall. Other periods of pain, such as 1987, were not as ugly as the one from the October 2007 peak market to the 2009 bear-market bottom.
Those who were smart, prescient, lucky, and skillful enough bought the S&P 500 Index at the very bottom. They did so by choosing an exchange-traded fund (ETF) with the symbol (N:SPY), the classic ETF for the S&P 500 Index. It is highly liquid, trades in large volumes every day, and has a low internal expense ratio. It can execute within a penny or two of net asset value at any time. SPY was the first ETF and has been around since 1993, when exchange-traded funds became a tradable security.
If SPY was purchased on March 9, 2009, and held through September 30, 2015, a total return of approximately 223% was gained from that investment. That’s right; the value on September 30, 2015, was about 3.25 times the original investment. That value comprises the net total return after income distributions, expenses, and/or any internal costs. The only missing ingredient might be a few pennies per share in a broker’s commission to execute the transaction.
Pretty good, you say? We agree. But what if the resumption of the bull market meant that the capitalization-weighting structure of the S&P 500 Index did not capture the full repricing after the washout that occurred between October 2007 and March 2009? Was there another method to participate in the same 500 stocks?
The answer to that question is yes. One option is to use an equal-weighted, Guggenheim-sponsored ETF (N:RSP). It takes the same mix of stocks as SPY but distributes them equally. It has a rebalancing mechanism. It is not as large as SPY, and RSP may require a few pennies of additional trading friction because of its relative size. Most of the time, RSP can be executed within pennies of net asset value just as SPY can. Once in a while, when markets are moving rapidly and with great volatility, it may cost a few pennies more than SPY to complete the trade.
If RSP had been purchased instead of SPY on March 9, 2009, how would this different position within the same group of stocks have manifested itself? The total return from RSP during the identical period of time was approximately 297%.
In other words, if RSP had been purchased instead of SPY on March 9, 2009, the total return through September 30, 2015 would have been about 70% more for RSP than SPY (net of all costs except the same brokerage commission paid in either case). In an ongoing bull market, the difference in returns between equal and capitalization weighting can be enormous. The evidence speaks for itself. Cumberland Advisors’ US ETF portfolio has an ongoing position in RSP instead of SPY.
David R Kotok , Chairman & Chief Investment Officer.