RSP vs. IVV: A Value Investor's Look at Cost, Compounding, and the Equal-Weight Bet

For the value investor, the choice between these two S&P 500 ETFs is a lesson in compounding mechanics. At its heart, the divergence is philosophical. IVV is a pure, low-cost market-cap-weighted index fund, passively tracking the index as it naturally evolves. RSP, by contrast, is an equal-weighted fund that actively rebalances its holdings quarterly to maintain an identical stake in each of the 500 companies. This structural difference is the engine driving their long-term performance.

The result is a stark performance gap. Over the past decade, IVV's market-cap-weighted approach has compounded wealth far more effectively. It delivered a 10-year total return of 249.28%, while RSP's equal-weight strategy posted 164.91%. This isn't a minor variance; it's a 84-percentage-point difference in total return. The mechanism is clear: by overweighting rising stocks and underweighting declining ones, the cap-weighted structure captures more of the market's upward momentum, especially during tech-led rallies where giants like Apple and Microsoft dominate.

This advantage comes with a significant cost. IVV's expense ratio of 0.03% is a fraction of RSP's 0.20%. For a long-term investor, that 0.17% annual fee gap is a tangible drag on compounding. It means a dollar invested in IVV has more of its own earnings working to generate further growth. RSP's higher cost is the price of its distinct bet on diversification, a strategy that levels the playing field but historically has not paid off in total return.

The bottom line for a disciplined, long-term thinker is that IVV's lower cost and market-cap-weighted structure have, over the long cycle, proven superior for wealth accumulation. RSP offers a different, higher-cost proposition that appeals to those seeking a more equal footing among companies, but its track record shows it has not been the better compounding machine.

Financial Impact: The Drag of Fees and the Rebalancing Tax

The structural differences between these two ETFs translate directly into tangible financial outcomes. For a long-term investor, the cost of capital is a silent but powerful force. IVV's expense ratio of 0.03% versus RSP's 0.20% creates a persistent 0.17% annual drag on returns. Over a decade, that gap compounds into a significant tax on wealth creation. It means a dollar invested in IVV has more of its own earnings working to generate further growth, a principle central to the compounding engine that value investors seek.

RSP's equal-weight strategy introduces another mechanical cost: its quarterly rebalancing. This process forces the fund to sell shares of its winners-stocks that have appreciated and grown in market cap-and use the proceeds to buy shares of its losers. This is a form of forced selling at highs and buying at lows, a direct tax on performance that a simple buy-and-hold strategy avoids. While this rebalancing maintains the fund's equal-weight philosophy, it systematically erodes returns relative to a passive market-cap-weighted approach that naturally adjusts without forced trades.

The numbers tell the story. Despite RSP's higher dividend yield of 1.6% versus IVV's 1.2%, its total return over the past year was a full 5.4 percentage points lower. This stark divergence shows that the yield advantage is insufficient to overcome the twin disadvantages of higher fees and the rebalancing tax. The equal-weight bet, while offering a different risk profile and sector mix, has not paid off in total return over the long cycle.

The bottom line is one of compounding math. IVV's lower cost and passive, market-cap-weighted structure have, over time, proven more effective at preserving and growing capital. RSP's higher cost and its active rebalancing process act as a persistent headwind, a mechanical force that works against the investor's long-term goals. For the value investor, this is a clear lesson: the cheapest, most efficient way to capture the market's long-term growth is often the best path.

Risk, Diversification, and the Investor's Choice

For the value investor, risk is not just about volatility; it's about concentration and the durability of a company's competitive position. Both IVV and RSP offer broad exposure to the S&P 500, but they achieve it through fundamentally different lenses, each with its own risk profile.

IVV's market-cap weighting concentrates exposure in the largest, often most dominant, companies. This creates a form of structural concentration risk. As one analysis notes, a single giant like Apple can command a substantial weight-about 7.57% of the index at one point. This means the fund's performance is heavily tied to the fortunes of a handful of titans. While this has historically amplified returns during bull markets, it also increases vulnerability during sector-specific downturns. If the tech sector faces a prolonged correction, IVV's performance will feel the full brunt of that decline.

RSP's equal-weighting directly addresses this concentration by providing a more balanced exposure. Each of the 500 companies, regardless of size, holds an identical stake. This forces a more diversified portfolio, with top holdings representing less than 0.3% of the fund. The result is a different sector mix, pulling weight away from tech and toward areas like industrials and financials. From a diversification standpoint, this is a clear advantage. It reduces reliance on any single stock or sector, potentially offering better protection during a downturn in any one area.

Yet this benefit comes at a cost. RSP's higher expense ratio of 0.20% and its quarterly rebalancing tax-selling winners and buying losers-act as persistent headwinds. These mechanics erode returns over time, a direct tax on the investor's capital. Furthermore, the fund's smaller asset base of $77.2 billion compared to IVV's $758.5 billion may affect liquidity and tracking precision, especially during periods of high market volatility.

Both strategies carry similar overall market risk, as shown by their nearly identical betas of 1.00 and 0.99. This means they move in tandem with the broader market. The real divergence is in the nature of the risk: IVV's is a concentration risk in the largest, most influential companies; RSP's is a diversification risk, spread thinly across all firms, but paid for with higher fees and forced trading.

For the disciplined value investor, the choice hinges on tolerance for these distinct risks. If the goal is to capture the market's growth with the lowest possible cost and the least friction, IVV's concentrated but efficient structure is compelling. If the investor prioritizes a more equal footing among companies and is willing to pay a premium for that diversification, RSP offers a different, higher-cost path. The historical performance gap suggests the market has rewarded the lower-cost, concentrated approach. Yet the equal-weight strategy provides a tangible, lower-risk diversification that appeals to those wary of overexposure to any single stock.

Catalysts, Scenarios, and What to Watch

For the long-term investor, the current thesis is clear: IVV's low cost and market-cap-weighted structure have been the superior compounding engine over the past decade. Yet, the future is not written. The value investor must watch for the specific conditions that could alter this calculus, focusing on structural shifts and catalysts that challenge the status quo.

The primary catalyst for RSP is a sustained market regime where smaller, undervalued companies outperform large-cap growth stocks. This scenario has been rare over the past decade, which has been dominated by a few mega-cap tech giants. For RSP to close its performance gap, the market leadership would need to decisively shift toward the smaller, more diversified companies that its equal-weighting favors. This would allow its strategy-naturally underweighting giants and overweighting smaller firms-to capture more of the market's upward move. The fund's lower-tech, higher-industrial sector mix could then become an advantage, not a liability.

Investors should watch for two key developments that could change the cost-performance calculus. First, any significant reduction in RSP's expense ratio of 0.20% would directly improve its long-term return. While a fee cut is not imminent, it remains a potential catalyst if the fund's asset base grows substantially. Second, and more likely, a visible and sustained shift in market leadership toward smaller caps would be the most direct validation of RSP's philosophy. This would need to be more than a temporary rotation; it would require a multi-year trend that favors the types of companies RSP holds in equal measure.

For IVV, the key risk is not a change in strategy but an intensification of its inherent overconcentration. As the fund's weight in the largest companies grows, its vulnerability to a prolonged downturn in any one sector-most notably tech-increases. The historical performance shows this concentration has been rewarded, but it is a structural risk. The fund's low cost of 0.03% and its broad market representation provide a reliable, low-friction compounding engine. The challenge is to ensure that this engine is not straining against a single, overexposed wheel. The market's recent volatility has shown that even the largest companies are not immune to sharp corrections.

The bottom line is one of patience versus potential. IVV offers a proven, efficient path to market returns, but its success is tied to the continued dominance of a few giants. RSP offers a different, higher-cost path that could pay off if the market's center of gravity shifts away from mega-caps. For the value investor, the watchlist is simple: monitor the sector rotation and be alert for any change in the fee structure or market leadership that could signal a new regime. Until then, the compounding math favors the lower-cost, concentrated approach.