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Yes, you are exactly right, that's what I was missing. Is there any theory behind this sort of weighting or is just one of those things that someone figured wa
by bradleyjg 13y ago
Yes, you are exactly right, that's what I was missing.
Is there any theory behind this sort of weighting or is just one of those things that someone figured was worth a shot?
- pyguysf 13y agoYes, the rationale is to maintain equal sector exposures across your portfolio.
- bradleyjg 13y agoThat's tautological. Is there any reason rooted in -- for example -- portfolio theory to believe such a strategy will outperform market cap weighting on a risk adjusted basis?
- fawce 13y agoSector weighting equally is based on diversification. Market cap weighting will tend to bet more on winners (the market cap is going up), concentrating your investment there. Another way to think about it: market cap weighting is a momentum strategy. Equal across sectors is mean reversion.
- pyguysf 13y agoIn the broader topic of portfolio management, equal weighting will outperform cap weighting due to the small cap effect (read up on Fama-French three factor model). tldr: historically small caps outperform large caps. In this case, the equal weighting is abstracted away by 1 layer - each ETF is already cap weighted, so you aren't getting the full effect of equal weighting. Instead, you're reallocating to the ETF that has underperformed relative to all others, so as already pointed out, you are betting on reversion rather than momentum.
- im3w1l 13y ago>equal weighting will outperform cap weighting due to the small cap effect Just because the sector is big doesn't mean the companies in that sector are big.
- pyguysf 13y agoThe small cap effect has nothing to do with sectors. If the sector is big because it has a lot of medium/small sized constituents you gain from this implementation because a cap weighted index would under allocate to these smaller names.