The Problem with Equal Weight Index Funds
•January 25, 2026
0
Why It Matters
Understanding the hidden costs and risk profile of equal‑weight funds helps investors achieve desired factor exposures more efficiently, preserving returns while minimizing turnover and unintended momentum bets.
Key Takeaways
- •Equal‑weight funds reduce top‑stock concentration but increase turnover.
- •They tilt toward small‑cap, value stocks, raising volatility.
- •Higher turnover adds explicit trading costs and implicit tax drag.
- •Systematic negative momentum exposure can hurt performance in rising markets.
- •Targeted factor tilts achieve similar exposure with lower costs.
Summary
The video examines why equal‑weight index funds, despite their popularity, are not a superior alternative to market‑cap weighted funds. Ben Felix explains that equal weighting eliminates the heavy concentration in mega‑caps like Apple, but it does so by forcing large rebalancing trades, creating higher turnover, added transaction costs, and a systematic short‑momentum bias. Key data points include the Invesco S&P 500 Equal Weight ETF’s modest outperformance since 2003, a turnover rate more than ten times that of a traditional cap‑weighted S&P 500 ETF, and a 15‑year standard deviation noticeably higher than its cap‑weighted counterpart. Factor regressions show the equal‑weight fund loading positively on size and value while loading negatively on momentum, indicating that its returns stem largely from exposure to smaller, cheaper stocks rather than any intrinsic advantage of equal weighting. Felix contrasts this with Dimensional’s US Core Equity fund, which achieves comparable small‑cap and value tilts with a net expense ratio of 0.15% versus 0.20% for the equal‑weight ETF, and does so with far lower turnover and without a negative momentum exposure. The fund’s sector caps and selective trading rules illustrate how intentional factor tilts can replicate the benefits of equal weighting while avoiding its inefficiencies. For investors, the takeaway is clear: if the goal is to reduce concentration and gain exposure to lower‑priced, smaller‑cap stocks, a smartly designed factor‑tilted fund can deliver the same risk‑adjusted returns with less volatility, lower costs, and fewer unintended bets. Equal weighting is not a magic solution; it merely packages known factor exposures in a less efficient vehicle.
Original Description
Market capitalization weighting, which is what typical index funds do, assign index weights based on each company’s size. An equal weighted index fund, as the name implies, equally weights all of the stocks in a market or market segment.
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.
------------------
Meet with PWL Capital https://pages.pwlcapital.com/en-ca/contact-us?utm_source=content&utm_medium=youtube&utm_campaign=benfelix_yt
Avoid Online Scams https://pwlcapital.com/stay-safe-online/
Check out the Rational Reminder Podcast
YouTube channel @rationalreminder
Podcast website https://rationalreminder.ca/
Rational Reminder community (forum) https://community.rationalreminder.ca/
0
Comments
Want to join the conversation?
Loading comments...