Does ‘buy the whole market’ work during changing times?
A popular strategy is to use ETFs or Mutual Funds to buy the whole market. This works great in normal times where not a lot of change is happening. The strategy relies on the collective wisdom of all investors pricing the stocks correctly. When major changes are happening such as those caused by a pandemic or major shifts such as green energy, The winners and losers may really stand out from the broad market. In these times, The talented analyst may significantly outperform the broader market.
Are equal weight ETFs the way to go?
In typical ETFs, the stocks are market cap weighted. So the stocks with a high market cap will have a higher percentage in the fund. For S&P 500, the top 3 stocks will make up 16% of the fund. There are other funds that are equally weighted such as RTM. This is enticing because your fund is essentially auto re-balanced. As a given stock goes up relative to the other stocks in the fun the number of shares will be reduced. Similarly if a stock goes down, more shares will be added. This sounds like a win as you are taking profits from the winners and buying more shares when stocks are lower. On the flip side, what about a stock that is in decline, maybe on its way to bankruptcy. As the stock drops you keep buying more and more and more. In this situation, it might not be a happy ending.