Equal-Weighting: An Alternative To The Standard Index

In fact, if we look backward over a longer timeframe, there were much worse periods when equal-weighted indices underperformed.

Let’s start with the S&P 500.

Although the spread between the two indices trends higher over time, looking at the dips yields some scary drawdowns.

Here are the periods when the S&P 500 equal-weighted index underperformed the market-capitalized index with the corresponding level of underperformance.

These periods of underperformance are measured in years, not months!

Let’s look at the same graphs for the TSX60 index.

There are plenty of periods when equal-weighted indices underperform their market-capitalization brethren and this “drawdown” of the relative performance of the equal-weighted index makes it difficult for investors to stick with the strategy.

It’s easy to look at the results and intuitively say investing in equal-weighted indices is a no-brainer. But the reality is that sticking with this strategy is much more difficult than it appears.

Although it is impossible for large smart long-term capital pools to invest in equal-weighted indices due to liquidity constraints, for most investors, this is a non-issue. The only question is whether the investor has the fortitude to withstand the long periods of underperformance. And make no mistake, there will be periods when this strategy lags. Yet over the long-run, equal-weighted indices potentially offer an attractive alternative to standard passive investing . Make sure you take the time to check out what’s available and think about equal-weight strategies for your portfolio.

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Disclosure: None.

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