Equal Weight Investing in 2025: Costs, Benefits, and Top Examples

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What is Equal Weight Investing?

Equal weight investing is an approach where each stock in a portfolio or index is assigned the same importance, regardless of the company's market size. Unlike traditional market-capitalization weighting, which favors larger companies, equal weight treats small-cap and large-cap stocks equally when assessing overall portfolio performance.

This strategy is often referred to as an unweighted index because it does not prioritize companies based on market capitalization or stock price.

Key Insights

• Equal weight allocates identical significance to each stock, balancing exposure across all holdings.
• It contrasts with market-cap weighting, the more common method used by major indices and funds.
• The approach has gained popularity due to the strong historical returns of small-cap stocks and the rise of equal-weight ETFs.
• Equal-weighted funds typically experience higher portfolio turnover, leading to increased trading costs compared to market-cap weighted funds.

Understanding Equal Weight vs. Market-Cap Weight

Most well-known indices, such as the S&P 500, are weighted by market capitalization, meaning larger companies like Apple and Microsoft have a greater influence on index performance. Price-weighted indices like the Dow Jones Industrial Average assign weight based on stock price.

Equal weight investing, however, assigns the same weight to every stock regardless of size, giving smaller companies equal footing with industry giants. This approach has attracted attention because small-cap stocks often deliver higher growth potential.

Quick Fact

As of September 2021, the top holdings in the Dow SPDR Dow Jones Industrial Average ETF Trust (DIA) included UnitedHealth Group, Goldman Sachs, and The Home Depot.

Performance of Equal-Weighted Indices

Small-cap stocks generally carry higher risk but offer greater return potential. Equal weighting amplifies exposure to smaller companies, which can boost short-term returns. For example, between September 2020 and September 2021, the S&P 500 Equal Weight Index returned 41.93%, outperforming the traditional S&P 500’s 33.72% return.

However, over longer periods, the advantage diminishes. From September 2011 to September 2021, the S&P 500 Equal Weight Index had an annualized return of 15.32%, slightly trailing the 16.32% annualized return of the market-cap weighted S&P 500.

Important Note

The S&P 500 Equal Weight Index was launched in January 2003 by S&P Global to provide an alternative weighting method. Both indexes include the same stocks but differ in weighting, resulting in distinct performance characteristics and benefits for investors.

Popular Equal-Weight Funds in 2024

Invesco offers a broad range of equal-weight ETFs covering major indices and sectors. For instance, the Invesco S&P 500 Equal Weight ETF (RSP) grants equal exposure to all companies in the S&P 500, from small firms to large corporations like General Electric.

Caution

Equal-weight funds require frequent rebalancing to maintain equal stock weights, which leads to higher portfolio turnover and increased trading costs. This can cause greater price volatility compared to traditional index funds. Nonetheless, equal-weight ETFs can provide better risk diversification if a particular sector declines sharply.

Other notable equal-weight ETFs include the Invesco Russell 1000 Equal Weight ETF and the First Trust NASDAQ-100 Equal Weighted Index Fund, which track their respective equal-weighted indices.

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