After being dominated by mega-cap tech, the 'average' stock is making a comeback — how to play it

Published Wed, Nov 11 202012:30 PM ESTUpdated Wed, Nov 11 202012:50 PM EST

The broader U.S. market is seeing a larger number of shares do well after being dominated by a handful of mega-cap names for most of 2020, signaling a comeback for the so-called average stock. The Invesco S & P 500 Equal Weight exchange-traded fund ( RSP ) has jumped more than 6% this week, while the SPDR S & P 500 ETF ( SPY ) is up just 1.8% over that time period. Those gains helped the RSP narrow its year-to-date performance gap against the SPY. Those gains came as investors cheered positive coronavirus vaccine news that lifted expectations of a broad economic recovery, shifting money away from tech giants such as Amazon and Microsoft and into beaten-down names such as United Airlines and cruise operator Carnival . But for investors who want to ride this market shift, but in a less risky way, the RSP could be the way to go. "If you're hesitant to make any major sector changes, swapping out a portion of SPY-type holdings for RSP does make sense to us now over the medium term," said Tom Essaye, founder of The Sevens Report, in a note. "It's a low-risk, lower-cost way to instantly reduce exposure to tech, and increase exposure to value." Earlier this week, Pfizer and BioNTech announced their coronavirus vaccine candidate was more than 90% effective in preventing the coronavirus. The news propelled the S & P 500 to an intraday high and is more than 1% this week, led by shares of companies that would do better as the economy recovered. Energy and financials, the two worst-performing sectors year to date, have rallied 16.5% and 7.5%, respectively, this week. Beaten-down airline United is up more than 12% this week and Carnival has gained nearly 20% over that time period. Tech and consumer discretionary, this year's best-performing sectors, are down slightly this week. Amazon is down 5.7% week to date and Microsoft is down nearly 3%. That rotation also lifted the RSP into positive territory for 2020. The ETF is now up more than 3% year to date while the SPY has gained 10% over that time period. The RSP has lagged its market-cap weighted counterpart throughout 2020 as investors piled into a few tech-related names that performed well in the throes of the pandemic. The RSP weighs all stocks in the S & P 500 equally, meaning it does better if a larger number of stocks rise. The widely followed SPY is market-cap weighted, making it more susceptible to the moves of a few shares with massive market values. Essaye of The Sevens Report said that while it still makes sense to hold "long-term positions" in major tech stocks, the vaccine announcement could "be a catalyst that could make the growth to value rotation finally have some staying power over the medium to long term." This would, in turn, drive the RSP higher in the near future.

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The broader U.S. market is seeing a larger number of shares do well after being dominated by a handful of mega-cap names for most of 2020, signaling a comeback for the so-called average stock.

The Invesco S&P 500 Equal Weight exchange-traded fund (RSP) has jumped more than 6% this week, while the SPDR S&P 500 ETF (SPY) is up just 1.8% over that time period. Those gains helped the RSP narrow its year-to-date performance gap against the SPY.

Those gains came as investors cheered positive coronavirus vaccine news that lifted expectations of a broad economic recovery, shifting money away from tech giants such as Amazon and Microsoft and into beaten-down names such as United Airlines and cruise operator Carnival. But for investors who want to ride this market shift, but in a less risky way, the RSP could be the way to go.