Equal weight investing strategy assigns equal weights to each constituent in the portfolio, instead of weighting them according to market capitalization. This strategy has been found to provide higher returns and better diversification compared to market cap weighted S&P 500 index in many studies. The keys are rebalancing to equal weights periodically and avoiding concentration in a few large cap stocks.
Equal weight outperforms market cap weight in S&P500
Research shows equal weight S&P 500 portfolio outperforms market cap weighted portfolio in terms of return, risk-adjusted return, and maximum drawdown over long term.
Gain exposures to multiple factors
The outperformance of equal weight strategy comes from exposures to value, momentum, volatility and other factors by underweighting large caps and overweighting small caps.
Equal weight investing provides a simple way to gain diversification and achieve higher risk-adjusted return in S&P 500 portfolio compared to market capitalization weighting.