Equally weighted indices are an “appallingly bad idea” according to Elroy Dimson, professor of finance at Cambridge Judge Business School said.
Speaking at ETF Stream’s ETF Ecosystem Unwrapped, Dimson said that equally weighted indices may appear to beat the market but are not “macro consistent”.
Dimson said: “They have to rebalance over time, meaning sell the winners and buy the losers to get back to equal weight.
“It makes it look like you are beating the market but that is not macro consistent.
“It would be a strange and impossible world when people have equal weight in mind, they believe in the small-cap effect and a resurgence in their performance, while the ‘magnificent seven’ to become ‘miserable seven’."
Equal-weight ETFs have been one of the most popular ETF trades over the past year as investors seek protection from overconcentration in US tech stocks.
Highlighting this, the Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW) captured $2bn of inflows in 2023 as investors sought more balanced exposure.
However, Dimson highlighted that the ‘magnificent seven’ stocks are “unimportant” as they represent a small fraction of the overall US equity market, and added overconcentration risk are largely unjustified.
“Apart from Japan, everyone else has a more concentrated market than the US, they are not driving the market to the same extent as a few names in most other markets,” he said.
Nvidia – the third-largest listed company and the poster child of the ‘magnificent seven’ – has been dominating headlines this year.
