Same 500 Stocks, Different Returns: How Smart Beta Won October

October may have been a challenging month for the S&P 500, but two things were also true. First, we saw investor appetite for the S&P 500 and equity exposure go undeterred by the market environment. Asset flows were spectacular. And second, we were reminded that S&P 500 exposure comes in different index flavors, and October showed just how dispersed results can be.Key Takeaways Massive ETF inflows defied market volatility. Smart beta, or alternative weighting methodologies, crushed the market-cap S&P 500 benchmark. Holding the exact same 500 companies yielded different outcomes based on construction methodology. More than $204 billion in fresh net assets found their way into ETFs in October, making it the highest monthly haul since the massive $228.9 billion inflows seen last December. October was a massive month for the ETF industry, despite market noise. Equity ETFs picked up over $120 billion of that total, with U.S. equity ETFs leading the way. Appetite for U.S. equity risk is alive and well. Some of the year’s most popular ETFs extended their asset creation streaks. The Vanguard S&P 500 ETF (VOO A) gathered another $23.7 billion last month while the competing State Street SPDR Portfolio S&P 500 ETF (SPYM) attracted another $9.9 billion. Both funds, which track the market-capitalization-weighted S&P 500, lost nearly 1% in October, but investor buying persisted. Year to date, VOO and SPYM, which are largely viewed as buy-and–hold advisor and retail favorites, have seen a combined asset haul that now exceeds $180 billion for the year. These ETFs are each up about 11% this year. Alternatively-weighted S&P 500 ETFs, meanwhile, have delivered really interesting results, some of which are increasingly getting noticed.Equal-Weighted S&P 500 Delivers Massive OutperformanceThe Invesco S&P 500® Equal Weight ETF (RSP B+) picked up $780 million in net new assets in October, bringing year-to-date total net inflows to $14.2 billion. The fund, which equal weights the S&P 500 stocks, tallied gains of about 5% in October, or outperformed the market-cap-weighted benchmark by nearly 6 percentage points. The monthly performance gap was among the widest that RSP has ever seen relative to the S&P 500, and it was a result of a market rotation away from big tech and into more defensive and value-leaning sectors like energy, healthcare, and utilities. Year to date, RSP is up 15%. Equal weighting S&P 500 names mitigates single-stock concentration risk that can exist in market capitalization-weighted portfolios, and it alters the return profile because smaller companies in the S&P 500 carry more weight in this type of strategy vs. a traditional market-cap approach. The methodology also changes sector exposures significantly. Consider a side-by-side comparison below, noting that in the past month, technology has dropped about 12% in value while consumer staples and healthcare have each delivered more than 11% in gains, according to State Street Investment Management data.Portfolio Comparison: RSP vs SPYM SectorsRevenue-Weighted S&P 500 The Invesco S&P 500 Revenue ETF (RWL A-) employs a revenue-weighted approach, offering another unique take on owning the S&P 500 stocks. The strategy looks at trailing revenues over one year for each company in the S&P 500, ranking the highest revenue-generating companies relative to their large-cap peers. RWL takes it another step and caps single stock exposure at 5%. The end result is a portfolio that currently tilts toward large-cap value, and very different sector exposures relative to the market-cap S&P 500. RWL has delivered a solid 4.3% gain in October — or outperformed the market-cap S&P 500 by more than 5 percentage points — and its year-to-date gains now exceed 18%. Focusing on revenues has worked well this year.Portfolio Comparison: RWL vs SPYM SectorsHistorical-Weighted S&P 500 The Tema S&P 500 Historical Weight ETF Strategy (DSPY ) offers another take on the S&P 500, owning the same 500 names but assigning a “historical weight” to each security based on trailing 35-year data. Historical weight is defined as “the average weight of each S&P 500 position on a monthly basis” going back 35 years. The strategy looks back at the basket of stocks, calculates how much the top holding represented, on average, in the past 35 or so years, and assigns that weight to the current top holding of the S&P 500. The approach tackles some of the top-heavy concentration we’ve seen in S&P 500 but it still stays largely aligned with the S&P 500’s sector exposures because DSPY focuses on single-stock allocation by portfolio position rather than by sector participation. In October, DSPY was barely positive, ending the month with gains of 0.35%, or outperforming the S&P 500 by just over 1 percentage point. Year to date, the fund is up more than 13%.Portfolio Comparison: DSPY vs SPYM SectorsPortfolio Construction MattersAs we dive deeper into November and the fourth quarter, a period that’s known to be seasonally strong for the equity market — and for ETF asset flows — it’s good to remember that index weighting methodologies matter when it comes to investment outcomes. There are many ways to access U.S. equity risk, even within a well-defined and hugely popular universe of stocks such as the S&P 500. The underlying holdings may be the same, but the results are different depending on the portfolio recipe used. For more news, information, and strategy, visit the Smart Beta Content Hub.