Equal vs Market Cap-Weighted Portfolios in Stock Market Crashes

And the winner is?

September 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • There is no consensus whether an equal or market cap-weighted allocation model for stocks is superior
  • Both generated similar drawdowns during stock market crashes on average
  • Theoretically, equal-weight is superior, but practically cap-weighted


“Diversify, reduce fees, avoid active trading, and keep it simple.”

Most investors would be well-served by following the above framework. But while easy to recommend, this rubric is rather difficult to implement.

For example, how does an investor diversify in 2021? Over the last 40 years, a simple equity and bond portfolio did a fabulous job generating attractive risk-adjusted returns. Not much was needed beyond these two asset classes. But with bond yields declining, fixed-income instruments have lost much of their luster. There are potential replacements, hedge fund strategies, for example, but these can be complex and expensive (read No Longer Superheroes? Twilight of the Bonds).

Indeed, other, even simpler asset allocation questions also lack easy answers. Consider the basic equity allocation. As per the framework, diversification, both across and within asset classes, is critical. For US-based investors, this means exposure to international and emerging markets. But what allocation formula should they apply? Market-cap or equal-weighted? Perhaps factor-based?

The same question holds within US equity allocations. How should they be weighted? The largest investors often have little choice. Given their liquidity requirements, they must pursue market-cap weighting. Smaller, more nimble investors, however, can allocate more to less liquid stocks.

Researchers have long compared the performance of equal- and market cap-weighted equity strategies, but no clear consensus has emerged on which is preferable. In the last two stock market crashes, during the global financial crisis (GFC) in the late aughts and the COVID-19 pandemic last year, a market cap-weighted portfolio outperformed in the US stock market.

But two data points are hardly statistically meaningful. So w