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VanEck makes case for equal weight investing

The $50 billion exchange traded funds issuer has made the case for equal weight investing, arguing a skewed exposure towards smaller stocks can outperform during periods of market recovery.

In its new research paper The road to recovery, VanEck examines three separate periods of recovery - the period following the 2001 dotcom burst, the 2008 GFC and the 2015-16 Greek debt crisis.

"The paper finds that during these recovery periods, equal weighting outperformed the benchmark market capitalisation index each time," VanEck said.

"This was due to the skewed distribution of individual stock returns, favouring the smaller stocks that give rise to outperformance.

"Equal weighting results in less exposure to larger companies, which have a narrow range of returns, and greater exposure to smaller companies which have a larger range, with a long tail of outperformers with very high returns."

VanEck managing director and head of Asia Pacific Arian Neiron said the paper demonstrates that equal weighting outperforms its market cap index counterparts both over the long term and after periods of market downturn.

"Equal weighting consistently gives greater exposure to smaller stocks than market capitalisation weighting does," he said.

"The very large companies which dominate market capitalisation benchmarks are not likely to be the ones with the extremely high returns.

"It is the smaller ones that generate the highest returns, and this enables equal weight indices to outperform market cap indices over the long term and during periods of market recovery."

The diversification across securities reduces concentration risk and exposure to mega-caps, he said, which traditionally dominate market cap indices.

"This is illustrated well by the long-term underperforming big banks and big miners which dominate the S&P/ASX 200's top 20 stocks," Neiron said.

"Equal weighting gives greater exposure to high growth outliers that are smaller companies and to higher growth sectors such as healthcare and technology."

Should the recovery from the COVID-19 crash follow recoveries of the Australian equity market in the past, a fund that tracks an equal weight index would likely outperform the S&P/ASX 200, Neiron concluded.

Read more: VanEckASXAsia PacificArian NeironEqual weigh investing
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