Equal-Weight Index vs. Market-Cap Weight
Would you believe that the same 'S&P 500' performs differently depending on how it's held? It's the difference between giving each of 500 stocks one vote, or giving more votes to bigger companies.
Two Ways to Hold It
Even with the same basket of stocks, the character of the index changes depending on how you assign weights.
Market-cap weighting: the bigger the company (market cap), the larger the weight. If you hold the S&P 500 this way, a handful of the largest-cap stocks strongly dominate the index.
Equal weighting: all 500 stocks get the same weight (about 0.2% each). Big or small, each gets one vote.
Representative products are SPY for market-cap weighting and RSP (Invesco S&P 500 Equal Weight ETF, listed in April 2003) for equal weighting. Both hold the same 500 stocks, but the weighting rules differ.
The specific ETF names are meant to show real examples of the two methods; they are not a recommendation to buy.
Characteristics of Equal Weighting
Equal weighting has no large-cap concentration, but in exchange it develops other traits.
Weight shifts toward mid- and small-caps. Since a big company and a small company get the same weight, the influence of relatively smaller stocks grows. Sectors like industrials, financials, and materials tend to get larger weights than under market-cap weighting.
Also, to keep weights equal, you have to periodically realign them. RSP rebalances each quarter, and this process is a contrarian structure of 'selling stocks that rose and buying stocks that fell.' In exchange, trading is frequent, so turnover is high, and the expense ratio also tends to be higher than market-cap weighting (SPY about 0.09%) — RSP about 0.20%. High turnover can also increase the tax and cost burden.
Performance Varies by Period
'Which is better' has a different answer depending on the era.
RSP has at times been tallied as beating the market-cap-weighted S&P 500 by roughly 1% per year on average from its listing (2003) through 2022. Equal weighting was favored in phases where market breadth was wide or where small/mid-cap and value stocks were strong.
Conversely, in phases like 2023–2024 where a small number of large tech stocks led the market, market-cap weighting was far ahead, and as a result the cumulative performance since listing ended up similar between the two methods.
Drawdowns are also worth noting. The maximum drawdown (MDD) since listing was about -60% for equal weighting (RSP), actually larger than the roughly -55% of market-cap weighting (SPY) (both based on the 2008 financial crisis). With more exposure to small/mid-caps, equal weighting shook more in down markets.
The figures are approximations cross-referenced across various tallies such as PortfoliosLab and Yahoo Finance, and they vary with the period, data, and cost treatment used. Past performance does not guarantee the future, and neither method can be said to be 'always better.'
Frequently Asked Questions
Q. Since equal weighting diversifies better, is it safer?
Single-stock concentration decreases, but you cannot conclude it is 'safer.' In fact, there are cases where greater small/mid-cap exposure led to larger drawdowns in down markets (in 2008, RSP about -60% vs. SPY about -55%). The diversification method is simply different; if the whole market falls, both take losses.
Q. So should I choose equal weighting or market-cap weighting?
There is no single answer. Market-cap weighting tends to lead in large-cap-driven markets, and equal weighting tends to lead when market breadth is wide, so the winner flips from period to period. Understanding each one's traits and costs (equal weighting has higher turnover and expenses) comes first, and this article is not a recommendation of any particular product.
📋 Results are based on historical data; past returns do not guarantee future returns.
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