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> Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest mark
by ac29 6y ago
> Market cap weighting essentially results in what essentially a momentum overlay: new money is allocated disproportionately to the stocks with the highest market cap, resulting in those stocks going up even more
New money is allocated exactly proportionally to a stock's market cap in a cap-weighted index fund, by definition. New money into such funds can't disproportionally increase the price of one stock in the index versus another.
- smabie 6y agoSorry, I phrased that incorrectly/poorly. What I meant to say is that market cap weighting allocates more money to stocks that have a higher market cap (and the stocks got that way by going up in the past), pushing up the price even more. This wouldn't be true if all shares of a company were all trading at the same time, but that's not the case. The number of available shares is more constrained than the total free floating market cap would suggest.