Why EW Beats VW

Why do equal-weighted (EW) portfolios outperform their market capitalization-weighted, or value-weighted (VW), counterparts over multiple decades in various investment universes? In their November 2022 paper entitled “Why Do Equally Weighted Portfolios Beat Value-Weighted Ones?”, Alexander Swade, Sandra Nolte, Mark Shackleton and Harald Lohre analyze drivers of differences in performance between EW and VW U.S. stock portfolios over six decades. They also assess consistency of performance drivers. Using monthly returns for a very broad sample of U.S. common stocks and monthly stock factor returns during July 1963 through December 2021, they find that:

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