Equally weighting the sectors is a way to reduce the impact the positive feedback loop from the cap-weighted approach. As certain sectors run, the equal weight approach systematically reallocates to undervalued sectors. Such an approach is not making tactical calls on the relative strength or weakness of a given sector. Instead, it is a way of systematically “selling high, buying low.”
Also, equal weighting the sectors is more of a value, long-term investing approach. One way to think about a cap-weighted strategy is as a “momentum” strategy. The stocks or sectors that go up continue to attract assets until the tipping point is hit and the momentum reverses itself. With the equal-weighted sector approach being more of a “value” strategy, it shuns momentum and trends and focuses more on the long-term value of a company.
Source: Zephyr StyleADVISOR
The aggregate impact on the portfolio is that you have more of a value tilt and less of an emphasis on the megacap names. Sometimes this works, sometimes it doesn’t. In 2015, when the “FANG” stocks delivered almost all of the S&P 500’s returns, the equal-weight strategy lagged. However, in 2016 equal weight was a positive driver to performance, as sectors like energy rallied. In 2017, the equal weight approach has trailed the S&P 500 as growth stocks have run circles around value stocks, again led by “FANG”. Long-term, however, the equal weight strategy still appears to be superior.