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Solactive AG published a new research paper comparing the performance of equally weighted versus market cap weighted index strategies......

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Timo Pfeiffer, Head of Research at Solactive AG


When Size Doesn’t Matter: Equal Weighting vs. Market Cap Weighting provides a detailed overview of the equal weighting method, comparing this to the more traditional market cap weighting scheme. In the former case, all securities are weighted equally, regardless of their market capitalization, whereas in the latter one, securities are weighted proportionally to their market capitalization.

Timo Pfeiffer, Head of Research at Solactive AG, comments: “Since different weighting systems result in different properties for otherwise identical portfolios, it is interesting to study what factors appear to account for this difference. For this reason, the paper not only compares the performance of market cap weighted portfolios versus equally weighted ones, but also investigates further in order to understand where this difference comes from.”

The paper finds that equally weighted portfolios outperform market cap weighted ones over a period of evaluation running from 2000 to 2017, falling more during bear markets, but recovering faster after downturns.

In conclusion, our study shows that the most important driver of the equally weighted portfolio’s outperformance is the higher exposure to small cap stocks. Therefore, although stock size is not taken into consideration with equally weighted strategies, it is actually the most important factor in explaining their outperformance over market cap weighted portfolios.

The publication of When Size Doesn’t Matter: Equal Weighting vs. Market Cap Weighting follows the release of The Downside of Low Volatility earlier this month, and is part of a growing collection of research papers published by Solactive AG.

 

Source: ETFWorld

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