This year, owning the S&P beat picking stocks.
The SPDR S&P 500 ETF (SPY) is up about 14%, while Amazon is up about 11% and Google about 9%. Even the managers who owned Micron, which is up 236%, didn’t own enough of it to make a dent.
It’s a brave new world of one-stock wonders.
And that’s opened up one of the most extreme splits I’ve ever seen in a pair of funds that usually move as one.
The Invesco S&P 500 Equal Weight ETF (RSP) holds the same 500 stocks as SPY. The difference is that every stock gets the same weight, so the 500th-biggest company counts as much as Nvidia.
Correlation measures how closely 2 things move together, and 100% means perfect lockstep. Over 10 days, RSP and SPY usually run somewhere around 92% to 100%.
Right now, there are huge breaks in that correlation, and SPY is dramatically outperforming.
When 2 things that normally move together split this far apart, you can trade them coming back together. It’s called a pair trade, and it’s what I’m setting up.
I’ll go long RSP, meaning I’ll buy it, and short the S&P, meaning I’ll bet against it. For the short side, I’ll use micro S&P futures, smaller-sized contracts on the S&P that each cover about 50 shares’ worth of SPY. Then I’ll wait for the 2 to converge.
The trick is sizing it in dollars, not shares. RSP trades around $211, and SPY is around $800, so 100 shares of each would be a lopsided bet. You decide on a dollar amount for each side and build from there.
Want to see the split yourself? Chart 4 times RSP minus SPY. Thinkorswim can multiply but it can’t divide, so you multiply to make the comparison fair.
There’s risk, too. A gap this wide can get wider before it closes, so I’m sizing it so I can wait it out. Tomorrow, I’ll walk through building the whole trade, step by step.
A pair trade takes patience. Brandon Chapman’s approach is built for speed, with one screen he checks for about 6 minutes before the open.
Tomorrow at 1 p.m. Eastern, Brandon is giving away $2,000 in cash to one person on his live call.
It’s free, and you have to be there live to win.
Grab Your Free Switchboard Seat
To your success,
Don Kaufman
