In the latest piece from Research Affiliates Max Moroz, head of index research, and Engin Kose, senior researcher, look at different types of Smart Beta strategies, specifically at equal weighting, and examine the strengths and drawbacks of equal weighting versus market-cap and fundamentally-weighted strategies.
“Not all smart beta strategies are created equal. Although both equal-weighting and fundamental-weighting strategies earn long-term excess returns over capitalization-weighted indices, they differ in their performance and cost structure. We take a look at the dissimilarities.”
High Cost of Equal Weighting: Key points
- Equal-weight indices are easy to understand, amply diversified, and superior to cap-weight indices in long-term performance.
- Equal-weight indices have higher turnover and less liquid stocks than fundamentally weighted indices; they are also prone to select stocks that are more likely to be overpriced.
- The net-of-cost performance of an equal-weight strategy falls off with asset size much faster than a fundamentally weighted strategy.
See full online at: “The High Cost of Equal Weighting”