Most if not all indices used to track market performance seem to be capital weighted, i.e. shares with the largest capitalisation have a greater effect on performance than the shares in the index with smaller capital value.

Given that most private investors will tend to spread investments roughly equally rather than in line with market weighting, why are there no indices which show a non-market weighted return? 

Ian Forder

By Ian Conway, Senior Reporter

The issue with market cap-weighted indices is that they are overly impacted by the performance of a small number of large stocks, whereas equally weighted indices give a greater relative weighting to smaller companies.

While giving smaller companies a bigger weighting might be thought to increase the volatility of returns, in practice volatility is no more than that of a market cap-weighted index.

Moreover, because equally weighted indices are rebalanced every quarter, they effectively ‘buy low and sell high’. Stocks which have outperformed are trimmed, banking profits, while stocks which have lagged are topped up on a ‘pound-cost average’ basis.

While this incurs a fee, it can pale in comparison with the long-term outperformance of the equally weighted index versus its market cap weighted rival, as illustrated by the table.

The average annual performance between the 10 years to the end of 2019 was 9.9% for the equally weighted FTSE 100 index versus 7.8% for the normal FTSE 100 index.

There used to be an equally weighted FTSE 100 exchange-traded fund on the UK stock market, but it was shut down last year due to lack of demand. However, you can still track performance by looking at the equally weighted FTSE 100 index published by FTSE Russell.

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