Once you deposit cash into the RRSP the question then becomes what to invest the money in. One of the key pieces of most diversified portfolios is US equities and a popular choice is an index fund based on the S&P 500, perhaps the SPDR S&P 500 (symbol SPY).
Here's an intriguing complement or perhaps alternative - the Ryder S&P Equal Weight Fund which has the memorable ticker symbol of RSP (the connection to Canada's RRSP cannot be a coincidence, surely this is a prophetic sign ;-). For those more pragmatic and try-to-be-rational people, like me, a closer look at RSP reveals some tantalizing data.
The RSP is a passive index fund that differs from the traditional cap-weighted SPY by weighting the portion of each stock holding equally - i.e. each of the same 500 stocks in the S&P 500 comprises 0.2% (100% divided by 500) of the total. Keith Hawkins' excellent Investopedia article S&P 500 ETFs: Market Weight vs Equal Weight explains the similarities and the differences between the two approaches. The article compares results based on the underlying indices but what about the actual ETFs?
The simple Google Finance chart below of SPY vs RSP since the 2003 launch of RSP looks mighty good as RSP is up 42% compared to SPY's 12.6%.
But that's not the whole story. First, there is the question of total returns, which takes account of differences in taxes/ turnover/ capital gains, MER, bid-ask spreads, dividends etc. Turning to Morningstar, the Performance tab of the data on RSP and SPY shows us that RSP looks just as good if not better on a Total Return basis - despite an MER of 0.40% vs only 0.09% for SPY and turnover of 22% vs only 7%, RSP outperformed SPY by a massive 2.21% per year (2.08% 5-yr annualized trailing total return for RSP vs -0.13%) from 2003 to date. What is more, RSP's tax efficiency (see Tax tab) as expressed in the lower tax ratio of 0.48 vs 0.57 is better and RSP has capital losses stored up (against which future capital gains will be offset so that no capital gains will be distributed to fundholders causing tax liability) of minus 23% vs a gain of 3% on the books of SPY. Given the much higher turnover of RSP, I'd guess what is going on is that RSP is accumulating capital losses by having to sell losers leaving the S&P500 at the bottom (they sure cannot be obliged to sell by some company moving up, the S&P 500 is the top category!).
That's pretty good, but the second question is critical. Is this outperformance is only a manifestation of the value and smaller-cap tilt inherent in RSP's indexing method or of a fundamentally better method of tracking the market and thus sustainable in the long term through different market cycles and conditions? That the latter might be the case finds support from studies done by the EDHEC who found that cap-weighted indices in the USA, Europe and Japan were inefficient compared to equal-weighted indices they built, which were similar though not identical to RSP - e.g. Assessing the Quality of Stock Market Indices: Requirements for Asset Allocation and Performance Measurement by Noël Amenc, Felix Goltz and Véronique Le Sour. Standard and Poors' Equal Weighted Indexing Five Years Later on SSRN by Srikant Dash and Keith Loggie also reach the conclusion that equal weight indexing really works both for US stocks and internationally.
If the net effect of equal weight indexed funds is only to under-perform during strong bull markets (and bubbles) and outperform during bear markets, as the commentary by the Rydex's Carl Resnick says in this interview, then that is a very valuable quality, especially for the portfolios of people in retirement, when downside risk is a prime concern.
The big question I have not seen addressed directly, though the Dash-Loggie paper does show the recent varying correlation between the S&P 500 Equal vs Cap-Weight Indices, (it lessened considerably during the tech bubble which is a very good thing), is the correlation of equal-weighted indices with other asset classes. It is the combined effect in the overall portfolio that counts above all. If equal weight is significantly un-correlated with them, the added volatility of RSP on its own is not a concern since the overall portfolio volatility will decline. That characteristic is the reason I think having commodities in my portfolio, among other holdings, is worthwhile.
The idea of putting some RSP into an RRSP merits serious consideration.