Yang Tang

Yang Tang is the founder of Arch Indices and the manager behind VWI, an actively managed ETF focused on variable weighted indexing. Yang spent over a decade in quantitative finance, working at firms including Goldman Sachs, before building his own indexing methodology from scratch. His background combines deep quantitative research with practical experience in portfolio construction and risk management at the institutional level.

On this episode, Yang talks with Brad about why traditional market cap weighting creates structural problems for investors, how VWI's variable weighting methodology works under the hood, and the research behind his claim that smarter weighting alone can add meaningful alpha over long periods without requiring better stock selection.

The Problem with Market Cap Weighting

Yang's central thesis is straightforward: market cap weighting systematically overweights overvalued stocks and underweights undervalued ones. As a stock's price rises, its market cap grows, and index funds are forced to buy more of it at increasingly expensive levels. The reverse happens on the way down. This creates a built-in buy-high, sell-low dynamic that costs investors performance over full market cycles. Yang points out that this isn't a theoretical problem. Decades of academic research, including the foundational work of Rob Arnott at Research Affiliates, have demonstrated that alternative weighting schemes consistently outperform market cap benchmarks over long periods with similar or lower risk.

What makes VWI different from existing smart beta or fundamental indexing approaches is the variable component. Rather than applying a fixed alternative weighting scheme like equal weight or revenue weight, VWI dynamically adjusts its weighting methodology based on market conditions. The system evaluates which weighting factors are most likely to add value in the current environment and tilts the portfolio accordingly. This means the fund might lean more toward value-oriented weighting when valuations are stretched and shift toward momentum-friendly weighting when trends are strong. The dynamic adjustment is what separates VWI from static smart beta products that apply the same formula regardless of market conditions.

How VWI Constructs the Portfolio

The investment process starts with a universe of large cap US stocks, similar to the S&P 500. From there, the system applies multiple weighting factors simultaneously, combining fundamental metrics (revenue, earnings, book value, dividends) with quantitative signals (momentum, volatility, quality scores). Each factor gets a dynamic weight based on its expected contribution to risk-adjusted returns over the next period. The portfolio typically holds several hundred names, providing broad market exposure, but with very different weights than a traditional index fund would assign.

Rebalancing happens quarterly, with the system recalculating optimal factor weights and position sizes at each interval. Yang notes that turnover stays relatively low because the system is designed to avoid excessive trading that would erode returns through transaction costs. The changes tend to be gradual shifts in emphasis rather than wholesale portfolio reconstruction. Transaction costs are tightly managed, and the ETF structure provides tax efficiency through the in-kind creation and redemption process that allows capital gains to be exported from the fund. Yang emphasizes that VWI is designed to be a core equity holding, not a factor tilt or satellite position. The goal is to capture the equity risk premium more efficiently than market cap weighting allows while maintaining the diversification and liquidity characteristics investors expect from a broad market fund.

Research and Performance

Yang walks through the backtesting and live performance data behind VWI's methodology. The research shows that variable weighting has historically added 100-200 basis points of annualized alpha over market cap benchmarks with similar or lower volatility. The improvement comes almost entirely from the weighting methodology rather than stock selection, which Yang argues is a more durable source of alpha because it exploits a structural feature of how markets organize prices rather than relying on information advantages that erode as more participants compete for the same edge.

He also addresses the capacity question that frequently comes up with smart beta and alternative weighting strategies. Because VWI operates in the large cap space and maintains broad diversification across hundreds of names, the strategy can handle significant assets without degrading performance. The positions are all highly liquid names that can be traded efficiently even at meaningful scale, which means the fund won't run into the capacity walls that constrain more concentrated or small-cap-focused quantitative strategies.

Key Takeaways

• VWI dynamically adjusts its weighting methodology based on market conditions rather than applying a fixed alternative weighting scheme like equal weight or fundamental weight.
• The system evaluates multiple weighting factors (revenue, earnings, momentum, volatility, quality) and adjusts their emphasis quarterly based on expected contribution to risk-adjusted returns.
• Market cap weighting systematically overweights expensive stocks and underweights cheap ones, creating a structural performance drag that alternative weighting can exploit over full market cycles.
• Historical research behind VWI shows 100-200 basis points of annualized alpha over market cap benchmarks with comparable or lower volatility, driven by weighting methodology rather than stock selection.
• VWI is designed as a core equity replacement rather than a satellite position, targeting broad large cap exposure with a more efficient weighting approach that maintains full diversification.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.