No. of Recommendations: 5
We've discussed equal weight recently so there might be some interest in this. Ben Felix is a well-known investment personality, podcaster, youtuber, and manager. Not a Boglehead, but Boglehead adjacent, I'd say. He's Canadian, so he has that going for him.
Anyway, here's his 15-minute take on equal weighting:
The Problem with Equal Weight Index Funds
Equal weighting seems like the solution to many of the perceived problems that market capitalization weighted indexes have today, like high valuations and high levels of concentration in the top stocks. Equal weighting has actually outperformed cap weighting going back decades, but it introduces its own unique risks, costs and inefficiencies.https://youtu.be/xu7kMpLbJJs?si=q5pGZ--sIVKhiWJ8Tl;dw - Ben thinks equal weighting is an inefficient way of getting at smaller/cheaper stocks.
No. of Recommendations: 10
Tl;dw - Ben thinks equal weighting is an inefficient way of getting at smaller/cheaper stocks.
I think of it primarily for two advantages:
* Far more diversification than cap weight offers, along with very much lower company specific risk, and
* never overweighting overvalued super-large-caps, sidestepping any/all bubbles in that area.
The observation that it gives higher returns over the long run both theoretically and empirically (except during an occasional ongoing bull run-up of valuations in super-large-caps) is almost a side benefit.
To me, deploying capital into the S&P 500 is intended as a strategy for the "no nothing" investor. I don't mean that to mean a stupid person, but one without any above-average ability to analyze stocks. To me it's absurd to think such a person should put 37.5% of their life's savings into just 9 stocks, over 26% into just 4.
Consider: a non-specialist has no differential views about the prospective returns of one stock over another: they're all the same. What would the "Kelly criterion" rule advise for that person as a position size for, say, Apple, relative to others? *
Most importantly, spreading the money around works just fine. Ignore those deeply misleading studies about all the long run gains coming from a few knock-out winners. The chances of any S&P 500 firm making a total return profit in any given 3-month stretch is 58.80% in the last 69 years. That's enough of a tail wind to give a reliably positive real return over time.
Jim
* trick question - Kelly rule recommends that a person with no edge should bet nothing
No. of Recommendations: 1
Anyway, here's his 15-minute take on equal weightingAnd if that YouTube was too long, try the latest 1-hour Rational Reminder podcast, out today:
https://rationalreminder.ca/podcast/394The blurb:
Equal-weighted index funds sound like an elegant solution to some of today’s biggest investor anxieties: high market concentration, elevated valuations, and outsized influence from a handful of mega-cap stocks. In this episode of the Rational Reminder Podcast, Ben Felix, Dan Bortolotti, and Ben Wilson take a deep, evidence-based look at whether equal weighting actually improves portfolios—or simply introduces new risks under a different name. The discussion breaks down how equal-weighted indices differ fundamentally from traditional market-cap-weighted indexes, why equal weighting has historically outperformed in certain periods, and what’s really driving those results beneath the surface. The team explains how equal weighting tilts portfolios toward smaller, cheaper, and more volatile stocks, while also systematically trading against momentum due to frequent rebalancing.I haven't listened yet but will. I do enjoy the Rational Reminder podcasts.
No. of Recommendations: 5
I had Perplexity summarize the video:
Ben Felix argues that equal weight index funds mostly repackage small/value tilts in a clunky way, and that you can get similar factor exposure more efficiently with smarter implementation.
Core idea
Market-cap-weighted indexes let the market set each stock’s weight, require little rebalancing, and avoid making active bets on individual stocks or sectors.
Equal weight indexes give every stock the same weight, which reduces concentration in mega-caps and has historically outperformed cap-weighted indexes largely because it tilts toward smaller and cheaper stocks.
Risks and costs of equal weight
Equal weight portfolios end up with big overweights to small companies and underweights to large ones, which increases volatility and exposure to riskier small and value stocks.
They also create large sector over‑ and underweights (for example, underweight tech, overweight industrials), effectively turning them into an active sector bet that is hard to justify ex ante.
Maintaining equal weights requires frequent rebalancing; the S&P 500 equal weight ETF has had turnover more than 10 times higher than a cap-weighted S&P 500 ETF, adding trading costs.
Momentum problem
Equal weighting is structurally a negative momentum strategy: it systematically sells recent winners and buys recent losers at each rebalance.
Factor regressions show the S&P 500 equal weight fund loads positively on size and value but negatively on momentum, and all of these exposures are statistically significant.
Performance context
Over live data since 2003, the Invesco S&P 500 Equal Weight ETF has only slightly outperformed the S&P 500, and over 2005–present both the equal weight ETF and Dimensional US Core Equity 1 trail a standard S&P 500 ETF because large growth stocks did very well.
In backtests from 1971, equal weight looks very strong, but that period was favorable for small and value stocks, and the outperformance is explained by those factor tilts plus a drag from negative momentum, not by “equal weighting magic.”
Why he prefers alternatives
Dimensional’s US Core Equity 1 strategy targets similar small and value exposures but: limits sector deviations from the market, avoids trading against momentum, starts from market-cap weights, and keeps turnover modest.
Factor regressions show Dimensional’s fund has similar small/value tilts to S&P 500 equal weight but without a strong negative momentum load, and historically it has beaten the equal weight fund with lower volatility while still lagging the pure S&P 500 in a large‑growth‑led era.
His takeaway: if you want to tilt toward smaller and cheaper stocks to address concentration and valuation worries, it is more efficient to use a fund that intentionally implements those tilts (like Dimensional) rather than a naive equal weight index with extra risk, turnover, and a structural bet against momentum.
