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Traditional Equal Weighting May Not Be As Diversified As You Think

By John Feyerer

The core belief that we have held at PowerShares since we were founded back in 2002, and continue to hold today, is that funds tracking market-capitalization-weighted indexes may not represent the optimal investment strategy. Why? If one believes (as we do) that markets aren't perfectly efficient and security mispricing can and does exist, market-capitalization-weighted indices will, by definition, have overweighted those securities that through time proved to be overvalued and similarly will have underweighted those securities that proved to be undervalued - thus creating a relative drag on investment performance. Of course the quest for active managers is to accurately identify which camp each security falls into at a given point in time (overvalued versus undervalued) and position portfolios to capitalize on the reversion to the…