Episode 394: Equal Weight vs. Market Cap Weight Index Funds

(0:01:10) Introduction to Episode 394 and discussion about declining enthusiasm over long podcast runs.

(0:02:00) PWL Capital’s growing work with institutional clients and why index-based approaches are rare in that space.

(0:05:12) Episode topic introduced: equal-weighted index funds and why listeners keep asking about them.

(0:06:00) Definition of market-cap-weighted vs. equal-weighted indexes using the S&P 500 as the main example.

(0:07:14) Historical outperformance of equal-weighted S&P 500 indexes and why start dates matter.

(0:09:00) Equal weight vs. cap weight performance over the last decade: meaningful recent underperformance.

(0:10:21) Market concentration concerns and why equal weighting appears attractive during periods of high valuations.

(0:12:00) Why market-cap-weighted indexes do not mechanically buy more overvalued stocks as prices rise.

(0:16:14) Trading costs explained: explicit vs. implicit costs and why turnover matters more than TER.

(0:19:16) Capital gains, tax efficiency, and reporting differences between Canadian and U.S. funds.

(0:21:07) Market concentration historically shows little relationship with future returns.

(0:24:58) Volatility comparison: equal-weighted indexes are meaningfully more volatile due to small-cap exposure.

(0:25:12) Equal weighting increases exposure to small-cap, value, and high-volatility stocks.

(0:28:58) Sector distortions created by equal weighting and why this represents uncompensated risk.

(0:31:21) Unintended consequences: sector bets, security-level overweights, and forced rebalancing.

(0:32:30) Turnover is roughly 10× higher in equal-weighted funds than cap-weighted equivalents.

(0:33:15) Equal weighting behaves as a systematic anti-momentum strategy.

(0:34:02) Multi-factor regression results: positive size and value exposure, negative momentum loading.

(0:36:33) Rebalancing frequency trade-offs and how quarterly rebalancing amplifies momentum drag.

(0:42:21) Comparison with alternative approaches that target similar factor exposures more efficiently.

(0:44:47) Why backtests are seductive—and why live fund results matter more.

(0:47:40) Investor behavior, uncertainty, and the constant search for strategies that “fix” the market.

(0:48:41) Factor investing in disguise: most deviations from cap-weighting are just factor tilts.

(0:53:06) Equal weighting as an acceptable strategy—if investors understand and accept the trade-offs.

(0:57:18) Listener feedback, enthusiasm jokes, and discussion about Spotify video uploads and audio speed.