Why Do Equally Weighted Portfolios Beat Value-Weighted Ones?

Equal-weighted (EW) portfolios have outperformed their value-weighted (VW) counterparts over multiple decades in various investment universes. This paper investigates the long-term evidence or the EW–VW return spread in a broad U.S. equity universe across multiple factor models. Unsurprisingly, EW investing comes with a highly significant positive size factor exposure. Given its acyclic rebalancing character, EW investing is also found to benefit from short-term reversal effects while suffering from negative momentum exposure. We also document a pronounced seasonality effect in EW investing that would see outsized returns in January. We revisit these findings in the more investible universe of S&P500 stocks and discuss how to best harvest the embedded factor premia