The S&P 500 Equal Weight Index is one example of a much larger subset of alternatively weighted strategies that have historically beaten the market. In “The Surprising Alpha From Malkiel’s Monkey and Upside-Down Strategies,” [1] researchers from Research Affiliates examined different ways to weight stocks, including volatility (both high and low), earnings growth, and fundamentals (among others). All of these alternatively weighted strategies outperformed a market-cap-weighted index because they all tilted toward stocks with smaller market capitalizations and lower valuations, even if the tilt was unintentional.

The researchers went a step further and inverted the weight of each stock in these alternative strategies. Intuitively, if the alternative strategies beat the market, then inverting the weights should cause them to underperform. But surprisingly, the inverse portfolios also leaned toward stocks with smaller market capitalizations and lower valuations and wound up beating the market-cap-weighted portfolio.

The researchers then tested randomly assembled portfolios to further test this phenomenon and reached the same conclusion. In short, just about any strategy that did not weight its holdings by market capitalization ended up tilting toward stocks with smaller market capitalizations and lower valuations, which helped them outperform a market-cap-weighted benchmark. Had value and small size not paid off, the story probably would have been different.