Equal Weighting: A Tried and Tested Alternative Index Strategy
By Arian Neiron, Managing Director, VanEck (Australia)
With the global proliferation of index strategies investors are becoming wary of the range of ideas targeting an optimal risk return outcome. However, one tried and tested alternative weighting index strategy continues to demonstrate a superior outcome, equal weighting.
Equal weighting is simple. It takes the investable universe and gives each security an equal weighting, thereby mitigating size biases and sector concentration that can be found in a market capitalisation approach.
The performance benefits of equally weighting have been widely published by the academic community, with the main outperformance drivers being:
- A bias to value and smaller stocks; and
- Contrarian trading.
For example, the Australian equity market, as represented by the S&P/ASX 200 Accumulation Index, is dominated by its top 10 securities which make up 47% of the index – it is one of the most concentrated equity markets in the world. The Financials sector alone represents over 46%. The MVIS Australian Equal Weight Index has outperformed the Australian benchmark S&P/ASX 200 Accumulation across all key periods.
Source: Bloomberg, as at 31 March 2016. Past performance is not a reliable indicator of future performance.
More than often the simplest ideas are the best.
About the Author:
Arian Neiron is responsible for the strategy and day-to-day operations of VanEck’s Australian business. Prior to joining VanEck, Arian was a partner at boutique consulting firm Sunstone Partners, specialising in Asset and Wealth Management. Previously Arian worked for Perpetual as Senior Portfolio Specialist; Head of Product Development for Protected Investments; and Senior Product Manager for Platforms and Wholesale Funds. Arian has also held positions at Credit Suisse and MLC. Arian has a Bachelor of Commerce from Curtin University and a Diploma of Financial Services and is currently undertaking an MBA at Macquarie Graduate School of Management (MGSM).
The article above is an opinion of the author and does not necessarily reflect the opinion of MV Index Solutions or its affiliates.