Volatility-based weighting is taking us back to what Harry Markowitz told us to do in the first place, inspiring us to create non-market-cap weighted indexes based on defined risk and return assumptions and not empirical anomalies alone

The principles of Markowitz’s portfolio construction model, which requires explicit risk and expected return assumptions, are widely accepted. In practice, however, the most widely used portfolio construction techniques—market-cap weighting and its main rival, fundamental weighting—make no explicit assumptions about these very same risk and return parameters. The most recent departures from market-cap weighted indexing are a variety of weighting schemes based on market anomalies rather than standard investment theory. These schemes include minimizing the variance of the overall portfolio and maximizing measures of portfolio diversification.