Equal-weighting and value-weighting: which one is better?

Nan Qin () and Vijay Singal ()
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Nan Qin: Northern Illinois University
Vijay Singal: Pamplin College of Business, Virginia Tech

Review of Quantitative Finance and Accounting, 2022, vol. 58, issue 2, No 10, 743-768

Abstract: Abstract Prior research shows that noisy prices can introduce biases in returns causing equal-weighted portfolios to outperform value-weighted portfolios. In this paper, we reevaluate the superiority of EW portfolios in the presence of market frictions. We find that trading costs have limited impact on the performance of EW portfolios, while taxes cause the performance of both EW and VW portfolios to deteriorate by a similar magnitude leaving the superiority of EW portfolios intact. Besides mispricing, the results for small cap portfolios may also be affected by the size effect. Overall, EW portfolios earn annualized risk-adjusted returns between 1.23% and 1.79% even after accounting for trading costs and taxes.

Keywords: Indexing; Equally-weighted index; Stock return bias; Jensen’s inequality; Capital gains tax (search for similar items in EconPapers)
JEL-codes: G14 G23 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s11156-021-01008-w

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