The High Cost Of Equal Weighting

The High Cost Of Equal Weighting by Max Moroz, Engin Kose, Research Affiliates

Equal-weight indices have two clear advantages: They are easy to understand, and they generally outperform cap-weight indices over the long term. Their drawbacks are less apparent. They have higher turnover due to rebalancing than other smart beta strategies, and that turnover includes buying and selling lower-liquidity stocks. Our market impact model demonstrates that, as global assets under management increase, implementation costs tend to rise faster in equal-weight than in fundamentally weighted strategies. This article summarizes what we have learned about the relative performance of equal-weight indices before and after implementation costs.

The very first index fund, created by Wells Fargo in 1970, equal-weighted the stocks in...