Assessing the Impact of Rebalancing on Equal-weighted and Value-weighted Portfolios over Five Decades

Abstract

This study investigates the impact of transaction costs on the performance differential between equal-weighted portfolios (EWPs) and value-weighted portfolios (VWPs). Employing a comprehensive dataset of 181 stocks from 1970 to 2023, we utilize paired two-sample tests to identify statistically significant differences in turnover and risk-adjusted returns. Our findings reveal a substantial performance advantage for EWPs, with annualized return surpluses ranging from 115 to 188 basis points over VWPs, depending on the assumed transaction cost level. Notably, this outperformance persists until transaction costs reach a critical threshold of 728 basis points of portfolio turnover. The analysis further demonstrates that EWPs outperform VWPs in 94.5% of scenarios devoid of transaction costs, declining to 84% when incorporating realistic cost assumptions. These results highlight the potential of EWPs to exploit diversification benefits but also emphasize the crucial role of transaction costs in moderating their outperformance.