Exploring the alternatives to market cap weighting

Indexes are increasingly investible, but while market cap weighting remains the dominant methodology for exchange-traded funds and structured products, debates about its inefficient risk-return trade-off are as prominent as ever. But do alternative weighted strategies really deliver superior returns? By Magda Ali

Weighing the advantages of market cap and alternative weightings

For more than 50 years, financial engineering experts have focused on tracking the performance of markets through stock selection, based on the assumption that market cap weighted indexes were efficient. Since then, the size of assets under management tied to market cap weighted indexes has grown enormously, particularly over the last decade. However, this has attracted as much criticism as praise in the finance industry as well as the academic world. Many market participants vilify market cap