I have been an advocate of equal weighted portfolios essentially since the original study by de Miguel and others was published as a working paper in 2006. I have argued for more than 15 years, once you take uncertainty about future returns of assets into account, an equal-weighted portfolio is almost impossible to beat in the long run.
"On the other hand, equal-weighted portfolios benefit from their higher allocation to highly profitable companies."
But why does an equal cap weighted set up mean a higher allocation to profitable companies? When the only consideration is putting the same amount of funds into all the stocks in a benchmark ?
Equal weighted indexes contain an embedded "buy low, sell high" strategy in their periodic rebalances, which contribute significantly.
Joachim you say that :
"On the other hand, equal-weighted portfolios benefit from their higher allocation to highly profitable companies."
But why does an equal cap weighted set up mean a higher allocation to profitable companies? When the only consideration is putting the same amount of funds into all the stocks in a benchmark ?
What am I missing?
If you like equal weight you'll love inverse weight (YPS)