Rethinking equity allocation: time to embrace equal weighting?

In an era when a handful of mega-cap stocks dominate major equity indices, concentration risk has become a pressing challenge for investors. Indeed, traditional US market cap indices (non-equal weight) have outperformed equal weight indices this year as the big get bigger, which can happen in bull markets and stretch concentration risk even further.

In our last blog, we explored the portfolio vulnerability that has historically accompanied periods of market concentration, and explained why we believe diversification[1] holds the key to long-term resilience. 

In this follow-up, we examine the accelerating shift toward equal weighting, how it addresses the structural vulnerabilities of cap-weighted benchmarks, and what it means for long-term portfolio resilience.

A weighting scheme to reflect the real economy

Equity allocation isn’t just about sector or geographic tilts; it’s also about how company size influences your portfolio's risk and return profile. With the top 10 holdings now constituting 38% of the S&P 500[2], traditional cap-weighted indices may no longer reflect balanced economic exposure.

Equal-weight indices allocate capital evenly across all constituents, providing access to a broader set of companies rather than focusing entirely on mega caps. This weighting approach not only improves diversification but also delivers greater participation in broader economic shifts.[3] 

As highlighted in our previous blog, during many selloffs – such as in the financial crisis of 2007-2009 and in April 2025 – the S&P 500 Equal Weight index outperformed its cap- weighted counterpart. The performance edge was guided by a more balanced exposure and reduced dependency on a small number of dominant stocks.

The factor perspective on equal weight

Empirical research highlights that equal-weight indices tend to exhibit higher exposure to the size and value factors – referring to smaller companies and those that are undervalued – allowing portfolios to capture academically established sources of excess returns that could be missed by an exclusive focus on mega-caps. 

Studies also show that these strategies can produce more balanced performance across market cycles, reducing downside capture while enhancing upside participation, improving the Sharpe Ratio and stabilising long-term portfolio volatility.[4]

Equal weight indices gain broad traction

The S&P 500 Equal Weight Index has become one of the most widely tracked equal-weight benchmarks, with growing adoption from both institutional and retail investors.[5] The chart below shows a clear upward trend over the past 20 years – a trend that has accelerated over the past five years.

The liquidity advantage that accompanies widespread adoption is increasingly expanding beyond equal-weighted versions of indices such as the S&P 500. Today, investors have the option of equal weighted versions of indices that provide access to a subset of the broad equity universe. 

The S&P 100, for example, focuses exclusively on 100 of the most liquid, large-cap US-listed companies. This ensures high turnover capacity and minimal trading friction, making it a potentially attractive vehicle for tactical and strategic allocation. 

An equal weighted approach to this subset of the S&P 500 could combine these strengths with enhanced representation of the broad US economy beyond the tech sector.

Rethinking resilience in a concentrated market

As equity markets continue to be shaped by the influence of a few dominant names, investors face a pivotal decision in how they structure their portfolios. 

We believe equal-weight strategies offer a structurally straightforward and disciplined solution. These strategies not only mitigate concentration risk, but also provide more balanced exposure across high-quality businesses, historically enhancing both risk-adjusted returns and participation in broader market recoveries. 

In an environment where traditional benchmarks may not reflect the true breadth of economic opportunity, equal-weight indexing represents more than an alternative: it represents a strategic evolution in long-term portfolio design.

 
[1] It should be noted that diversification is no guarantee against a loss in a declining market.
[2] Source: Bloomberg, as at 30 July 2025.
[3] Source: https://www.spglobal.com/spdji/en/index-tv/article/examining-equal-weight-performance-in-challenging-markets/
[4] Source: https://www.spglobal.com/spdji/en/documents/education/education-equal-weight-indexing.pdf
[5] Source: https://www.spglobal.com/spdji/en/documents/education/education-the-growing-sp-500-equal-weight-liquidity-ecosystem.pdf