During his recent interview with Tobias. Phil Bak of Exponential ETFs discusses how investors can extrapolate the premium which is provided by equal weight portfolio versus market cap, saying:
Well, I think it really started and like you said, with equal weights. My background, I was at Ridex Investments, which is now part of Guggenheim, and the ETF is actually now part of Invesco, but one of the products that I was the product manager on at the time, was RSP, was the equal weight S&P 500. And we’re doing a lot of research and we’re trying to explain why is it that equal weight outperforms large cap. And mostly it’s a size tilt but it’s also the rebalance mechanism. We did a lot of empirical studies on those two and how they impact and market cap weight. And what I was trying to do is say, “Well, how do we take that premium of equal over market cap and how do we extrapolate that? How do we either isolate that or provide more of that?”
If you think about it, one of the analogies that we use a lot is tea. So nobody likes the room temperature tea. People like hot tea or they like ice tea, right? One of the other, nobody says, “Oh I want to get a cup of room temperature tea.” Well, the way we see it equal weight as a half measure. Equal weight is room temperature tea. If you want that tilt, if you believe that the smaller companies in the S&P 500 have more growth potential and that’s a better way to invest, then you should invest that way. And if you believe that the market cap weighting and momentum is a better way to invest, then you should invest that way. So really, it’s kind of the counterpoint or the other balance to market cap weighting.
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