Over the past 12-18 months, equal weight ETFs have surged in popularity among investors seeking broader diversification and reduced concentration risk, especially in U.S. equity markets. This trend is a direct response to the increasingly narrow leadership of mega-cap stocks, particularly in the US where the so-called ‘magnificent seven’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) have dominated index performance and skewed traditional market cap-weighted benchmarks like the S&P 500.
As an example of the problem, by the end of 2024, the top seven stocks in the S&P 500 accounted for over 30% of the index’s total market capitalisation – an all-time high. This historically extreme level of concentration surpasses even the levels seen during the dot-com bubble, a period not known for rational thinking and sensible investor behaviour!
The Mag-7 names alone were responsible for around 65% of the S&P 500’s total return of 24.23% in 2023, and they continued to drive more than 50% of the index's gains in 2024. This dynamic has raised concerns among allocators about market fragility, valuation risk and lack of breadth in one of the most widely followed passive benchmarks in investor portfolios.
To combat this, there’s been a surge in demand for index tracking products that weight the constituents differently, using techniques like equal weighting. In contrast to the more well known market cap-weighted S&P 500, the S&P 500 Equal Weight Index, for example, distributes weight evenly across all the index constituents, regardless of their market cap. As a result, its exposure to the Mag-7 names is drastically different, at around 0.2% per stock and, in aggregate, only around 1.2% of the index total (end April 2025).
Equal weighting offers two core advantages over market cap weighting: increased diversification and mean reversion potential. By not letting any single name or sector dominate the overall index, equal weight strategies inherently reduce idiosyncratic risk for an investor. Essentially, they allow the index performance to be more sensitive to an increased number of companies and sectors that would, in many cases, be otherwise under-represented in the traditional market cap-weighted index.
You can see this by comparing the GICS sector breakdown of the two indices below. Whereas information technology dominates the traditional market cap-weighted index, at the expense of the likes of energy, materials, real estate and utilities, the equal weight index has a more balanced sector profile overall.
Source: AJ Bell, S&P Global, June 2025 – S&P 500 Equal Weight Index vs S&P 500 Market Cap Weight Index – GICS® Sector breakdown as at 30 May 2025
Additionally, equal weight indices tend to have a natural value tilt. This is because they systematically rebalance out of stocks that have recently increased in value (and so have increased their size in the index) and reinvest the proceeds into those companies that have got cheaper on a valuation basis because of recent underperformance.
Critics of equal weighting point out that there are downsides to such strategies. Firstly, unlike market cap weighting, where the index in effect auto-rebalances weightings naturally via market cap changes, an equal weight index needs to manually rebalance regularly, increasing transaction costs for investors. Secondly, an equal weight index has anti-momentum characteristics. This sees the index selling recent winners and buying recent losers, meaning investors don’t benefit from momentum – which historically is a positively-rewarded equity factor.
These criticisms have some validity, but over longer time horizons an equal weight approach to the US has significantly outperformed a traditional market cap-weighted approach, and generally performs well in environments where index leadership is likely to rotate, or narrow led rallies begin to broaden out.
Source: 2025 Morningstar – S&P 500 Equal Weight Index vs S&P 500 Market Cap Weight Index – 31/12/1970 to 31/05/2025
The market cap-weighted S&P 500 delivered a 12.18% three-year annualised return to the end of April 2025. This compared favourably to the equal weight version of the index, which returned 6.72%. However, on the shorter time horizon of year-to-date to end of April 2025, the equal weight strategy outperformed, having fallen -2.88%, compared to -4.92% in the market cap-weighted index.
This is due to a tech sector sell-off early in 2025 and President Trump's tariffs in April, which together hit the Mag-7 and market cap-weighted strategy much harder. It is this type of divergence that vindicates the renewed interest in equal weight US allocations amongst allocators in 2024, and that will keep equal weight strategies in the minds of allocators into 2025.
Source: 2025 Morningstar – S&P 500 Equal Weight Index vs S&P 500 Market Cap Weight Index – 01/01/2025 to 30/04/2025.
At AJ Bell Investments, we first discussed the potential advantages of an equal weight S&P 500 position in 2024. However, we still felt that we could be sharper on the timing of our entry, and so waited until January 2025 before tactically rotating around 15% of our aggregate US equity exposure into an equal weight implementation.
This has proved favourable for our portfolios, as they avoided the underperformance in equal weight vs market cap weight S&P 500 in 2024 that some earlier movers had to endure. Instead, our portfolios benefitted from the recent outperformance of the equal weight approach, which helped cushion some of the falls that US equity investors saw in Q1 2025.
We continue to maintain this split approach towards the US, which we feel gives us better diversification in our equity positioning, and a degree of insulation from the over-concentration we see in the traditional market cap-weighted index. It also ensures that we don’t fall behind in periods where momentum and valuation driven rallies are in the ascendancy.
The value of investments can go down as well as up, and your client may not get back their original investment.
Past performance is not a guide to future performance, and some investments need to be held for the long term.
