How the equal weighted story is going so far

Equal weighted funds hit a boom period in 2025, with both a record number of launches and people buying them, as investors search for diversified ways to buy the US equity market in particular.

But in a year when just a handful of stocks have propelled the S&P 500 to almost 30 record highs, those taking this contrarian view to the US might be wondering if they’re missing out.

Equal weight versus ‘standard’ market cap

The majority of stock markets are designed so that the biggest companies get a bigger presence in the index, which means they have the largest impact on performance and volatility. This set up is called ‘market cap weighted’ and it’s why the S&P 500 has a lot of companies in it but only a handful of them really matter to overall returns.

Nvidia, Apple, Microsoft, Alphabet and Amazon account for 30% of the S&P 500 market cap alone and as these companies get larger, their presence in the index continues to intensify.

• Read: The rise of US dominance and risk of concentration

Equal weighted strategies dilute concentration risk in markets like the US by reweighting index constituents so that all the stocks have the same representation.

There are a plethora of funds offering equal weighted exposure to the US, the most popular among AJ Bell DIY-ISA investors being, the HSBC S&P 500 Equal Weight Equity Index Acc, iShares S&P 500 Equal Weight UCITS ETF USD (Acc) and the Legal & General S&P 500 US Equal Weight Index Fund. There’s only one fund on the market offering an equal weighted version of the MSCI World index, the Invesco MSCI World Equal Weight UCITS ETF Acc.

We can use the underlying MSCI and S&P benchmarks of these funds compared to the original indices to compare equal weighted to market cap weighted historically.

In the opening three months of this year, equal weighted indices were ahead by almost 6%, the biggest difference at that point in the year since 1992.

This was because a lot of tech names were caught up in AI-fear based selloffs, but these stocks have since recovered to multi-record highs and now the market cap index is pulling ahead by about 3%.

Looking longer term over three years, both the MSCI World and S&P 500 have made around 60% while the equal weighted versions made 40-45%. Going back five years and this disparity becomes even more pronounced, when being in a standard US tracker would have made almost 65% and equal weighted 50%.

Interestingly, over 20-years this pattern reverts back in the US market to equal weighted coming out on top with almost 780% return versus 690% from the S&P 500 as of 16 October.

Historically, the returns of market-cap and equal-weight versions of the S&P 500 have been highly correlated, but this relationship has decoupled since the pandemic, mainly because the big names have continued to see their share prices rise so much. This decorrelation became even more entrenched in 2025 when the tech giants had a much stronger recovery from the US trade war chaos than the rest of the market.

It’s been an equally bumpy ride for either investor journey as well, with fairly similar levels of volatility and worst days in the market (measured by maximum drawdown).

So why stick with equal weighted?

Seeing the S&P 500 smash its own record several times over this year and the market remaining very narrow might have some investors wondering why own an equal weighted version of the US in particular?

The main reason for using equal-weight funds is to reduce concentration risk. James Flintoft, Head of Investment Solutions at AJ Bell, says one of the reasons the investment team are using them when increasing its funds’ US exposure earlier this year is to avoid a corresponding rise in reliance on the market’s biggest stocks.

The worst days for these equal and market cap funds will also be different from the rest of the market. When giants such as Nvidia or Apple sell off sharply, equal-weight investors feel less of the impact because each stock has a smaller weighting. For example, during the ‘Liberation Day’ crash, the Magnificent Seven lost 30% of their combined value in one day, but those with equal weight exposure won’t have had such a torrid time.

A stalwart of portfolio construction is having a good mix of stocks and sectors working hard in different ways to drive returns from multiple angles and trends rather than just one story.

One of the reasons investors often like ETFs (exchange-traded funds) is because it gives immediate exposure to lots of companies, and equal weighted ones also naturally increases your allocation to medium and smaller sized companies.

This is useful when market returns broaden out from just the big names, periods of which we have seen this year. In fact, over the past year, US smaller companies funds are on average, performing better than the large-cap peers and periods where smaller companies outperform larger ones have often favoured equal-weight indices.

Things to bear in mind: fees and other types of risk

While an equal weighted fund can help address concentration and lack of diversification risks, it does introduce more small-cap risk into your portfolio.

This is part of the reason why equal weight funds are just as, if not at times more volatile than the S&P and global trackers.

Equal weighted can often cost more because the indices have to make more changes when rebalancing to maintain even weights, resulting in higher turnover and transaction costs than market-cap-weighted equivalents.

Data from Vanguard found that in the 10 years to November 2024, the S&P 500 equal-weight index had on average more than five times the turnover of the S&P 500 market-weight index. Higher costs impact performance.

But this doesn't mean that equal weighted funds are not relatively cheap versus say an active fund or even other ETFs and tracker funds.

This rebalancing element is what makes equal weighted funds an example of anti-momentum investing, which is when you run your winners and decrease exposure to companies that are underperforming. An equal weighted approach is essentially the epitome of the ‘buy low sell high’ mantra of markets.