Backtest caveats and live fund evidence

Equal-weighted index funds sound like an elegant solution to some of today's biggest investor anxieties: high market concentration, elevated valuations, and outsized influence from a handful of mega-cap stocks. In this episode of the Rational Reminder Podcast, Ben Felix, Dan Bortolotti, and Ben Wilson take a deep, evidence-based look at whether equal weighting actually improves portfolios—or simply introduces new risks under a different name. The discussion breaks down how equal-weighted indices differ fundamentally from traditional market-cap-weighted indexes, why equal weighting has historically outperformed in certain periods, and what's really driving those results beneath the surface. The team explains how equal weighting tilts portfolios toward smaller, cheaper, and more volatile stocks, while also systematically trading against momentum due to frequent rebalancing.

Key Points From This Episode:

(0:01:10) Introduction to Episode 394 and discussion about declining enthusiasm over long podcast runs.

(0:02:00) PWL Capital's growing work with institutional clients and why index-based approaches are rare in that space.

(0:05:12) Episode topic introduced: equal-weighted index funds and why listeners keep asking about them.

(0:06:00) Definition of market-cap-weighted vs. equal-weighted indexes using the S&P 500 as the main example.

(0:07:14) Historical outperformance of equal-weighted S&P 500 indexes and why start dates matter.

(0:09:00) Equal weight vs. cap weight performance over the last decade: meaningful recent underperformance.

(0:10:21) Market concentration concerns and why equal weighting appears attractive during periods of high valuations.

(0:12:00) Why market-cap-weighted indexes do not mechanically buy more overvalued stocks as prices rise.

(0:16:14) Trading costs explained: explicit vs. implicit costs and why turnover matters more than TER.

(0:19:16) Capital gains, tax efficiency, and reporting differences between Canadian and U.S. funds.

(0:21:07) Market concentration historically shows little relationship with future returns.

(0:24:58) Volatility comparison: equal-weighted indexes are meaningfully more volatile due to small-cap exposure.

(0:25:12) Equal weighting increases exposure to small-cap, value, and high-volatility stocks.

(0:28:58) Sector distortions created by equal weighting and why this represents uncompensated risk.

(0:31:21) Unintended consequences: sector bets, security-level overweights, and forced rebalancing.

(0:32:30) Turnover is roughly 10× higher in equal-weighted funds than cap-weighted equivalents.

(0:33:15) Equal weighting behaves as a systematic anti-momentum strategy.

(0:34:02) Multi-factor regression results: positive size and value exposure, negative momentum loading.

(0:36:33) Rebalancing frequency trade-offs and how quarterly rebalancing amplifies momentum drag.

(0:42:21) Comparison with alternative approaches that target similar factor exposures more efficiently.

(0:44:47) Why backtests are seductive—and why live fund results matter more.

(0:47:40) Investor behavior, uncertainty, and the constant search for strategies that "fix" the market.

(0:48:41) Factor investing in disguise: most deviations from cap-weighting are just factor tilts.

(0:53:06) Equal weighting as an acceptable strategy—if investors understand and accept the trade-offs.

(0:57:18) Listener feedback, enthusiasm jokes, and discussion about Spotify video uploads and audio speed.

Links From Today's Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on YouTube — https://www.youtube.com/channel/ Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Dan Bortolotti — https://pwlcapital.com/our-team/

Dan Bortolotti on LinkedIn — https://ca.linkedin.com/in/dan-bortolotti-8a482310

Ben Wilson on LinkedIn — https://www.linkedin.com/in/ben-wilson/

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)