>Equal weighted funds are more risky (volatile), but have higher historic returns than market cap weighted funds.

But do they outperform after risk adjustment? I doubt it and if not you're better off just leveraging a bit to your desired level of risk. The point of passive investing isn't that the trading strategy can be automated, the point is to say "I want to grab exactly the average return of the market every year". Trying to do anything else is by definition not achievable by everyone so why do people think they should be the lucky ones? What specific advantage does a retail investor bring to merit that?

I don't think it makes sense to equate risk with volatility. Say I have $1M. If I buy a cap weighted S&P 500 fund, I have about $40,000 in Apple, because it's about 4%. If I then switch to an equal weighted S&P 500, that $40K will be split up between 20 stocks with about $2K each. That is clearly more diversified with respect to company specific risk. It may or may not be worth it given increased fees, but you can't just dogmatically say it's equivalent to cap-weighted plus leverage. It's qualitatively different.

>you can't just dogmatically say it's equivalent to cap-weighted plus leverage

I'm saying it's strictly better to do cap-weighted plus leverage. That's what financial theory tells us anyway, that the best portfolio is whatever mix between risk free cash and the same mix as all the assets in the world. Deviating from that brings you farther away from the efficiency frontier. Now for this to hold EMH must hold and we know it's not true in the stronger forms which was why I was asking for a risk adjusted benchmark.

I don't think there's a theory that tells you risk is volatility. Isn't that more of an axiom? And I have the distinct impression it was chosen because it leads to tractable math. I'm not endorsing a specific alternative definition of risk, but I was suggesting risk is clearly multidimensional and intimately related to predicting what will be correlated in the future.

If you want to avoid the large cap companies but still want to use index funds, could simply buy mid & small cap index funds [1]. Of course more risk with smaller caps.

[1] such as ones based on the Dow Jones U.S. Completion Total Stock Market Index which holds the 500th to 5000th largest companies

What you want is an equal risk weighted SPY ETF - where each component is weighted such that the contribution to total volatility is equalized. This can be done using some off the shelf risk models from firms like MSCI. There was such an ETF (ERW), but it never really took off, and it no longer trades. Unfortunately these methods will just remain available to only more sophisticated market participants.

There's still a lot of opportunity for new types of passive index funds, using methods like you suggest. Maybe someone will start an up.

My hunch tells me specialized funds won’t beat cap weighted indexes from places such as Vanguard because of fees.

That's stretching the definition of passive investing. What the OP describes is an active strategy like any other. That you can automate it and wrap it in an ETF doesn't make it passive.

Why are you so bullish in crypto? Would love to hear your thoughts here (or send me a DM if you prefer).

I usually direct people who ask about this toward Andreas Antonopoulos and Tom Lee (of Fundstrat). Bitcoin's value seems to mimic that of social networks, which suggests that Metcalfe's law applies. I don't trust governments, especially in the US where we have rampant crony capitalism, and I'm anti-borders, anti-military, and anti-authoritarianism.

There's plenty of good information on Reddit (/r/Bitcoin is pretty good, /r/btc is more like InfoWars), but of course you need to be able to wade through the BS. I'm a Bitcoin maximalist (and have about 80% of my holdings in Bitcoin), with some ETH and LTC, and a long list of alts that I think might have potential.

I also don't recommend investing in Bitcoin (or any other cryptocurrency) unless you have a high tolerance for risk and can afford to lose it.

Here's an aantonop playlist if you want to binge: https://www.youtube.com/playlist?list=PLPQwGV1aLnTthcG265_FY...

When it comes to an index like the S&P 500 where even some of the smaller components (e.g. Church & Dwight Co (read: Arm & Hammer), Hilton, etc) would be considered "large cap" then you probably want to do equal weighting rather than market cap weighting.

When it comes to something like Vanguard's Total Market, you probably want to put more money into the blue chip stocks than into the smaller companies at the bottom of the list (sorted by market cap). Smaller companies have lower trade volume/are less liquid which makes them subject to greater volatility/price fluctuations. There is no sense taking on greater risk there when the reward opportunity doesn't meaningfully increase with it.

50% in crypto? Good luck man, that sounds very risky.

It could easily have started out as 5% in crypto a year ago and just recently grew to be 50%.

Closer to this, but with different numbers.

doesnt change how risky it is