{"id":173182,"date":"2025-04-06T07:34:18","date_gmt":"2025-04-06T07:34:18","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/will-equal-weighted-index-funds-outperform-their-benchmark-indexes\/"},"modified":"2025-04-06T07:34:18","modified_gmt":"2025-04-06T07:34:18","slug":"will-equal-weighted-index-funds-outperform-their-benchmark-indexes","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=173182","title":{"rendered":"Will Equal Weighted Index Funds Outperform Their Benchmark Indexes?"},"content":{"rendered":"


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Have you heard of an equal weighted index fund? It’s a unique fund that balances every holding equally.<\/p>\n

We love index fund, and we’ve recommended several in our Guide To Investing<\/a>. However, equal weighted index funds are gaining in popularity, and I think that has a lot of merit.<\/p>\n

An equal weighted index fund is just like it sounds – everything inside the index fund is equally weighted.  This differs from other index funds, in that most are capitalization-based, meaning stocks with higher market capitalization (or value) are held as a higher percentage of the fund.  <\/p>\n

Let’s see how that really breaks down…<\/p>\n<\/div>\n

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\n\t\tTable of Contents<\/strong><\/span><\/p>\n
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What Is An Equal Weighted Index Fund?<\/a><\/div>\n
How Equal Weighted Index Funds Perform<\/a><\/div>\n
Drawbacks to Equal Weighted Index Funds<\/a><\/div>\n<\/div>\n
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Lessons on Equal Weighted Index Funds<\/a><\/div>\n
Popular Equal Weighted Index Funds<\/a><\/div>\n<\/div>\n<\/div><\/div>\n<\/div>\n
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What Is An Equal Weighted Index Fund?<\/h2>\n<\/div>\n
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Let’s use the S&P 500<\/a> for this example.  You know that the S&P 500 is composed of the 500 largest stocks in the United States.<\/p>\n

Right now, a standard S&P 500 index fund (let’s use SPY), has the following Top 5 Holdings:<\/p>\n

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  1. Apple (AAPL) – 7%<\/li>\n
  2. Microsoft (MSFT) – 5.85%<\/li>\n
  3. Nvidia (NVDA) – 5.56%<\/li>\n
  4. Amazon (AMZN) – 3.76%<\/li>\n
  5. Meta (META) – 2.65%<\/li>\n<\/ol>\n

    So, as you can see, there is a much larger percentage of the fund in several stocks (and if you notice, these are all technology stocks), which can skew returns if these stocks perform well or poorly.  In fact, that happened with Apple – many broad index funds were up much higher than the market, simply because of the weighting of Apple and Microsoft in their portfolios. Just a few years ago Apple made up less 5% of the S&P 500 index. And Nvidia wasn’t even in the top 10 holdings.<\/p>\n

    Let’s look at what equal weighting does. One of the most popular equal-weighted funds is the Invesco S&P 500 Equal Weight ETF (RSP).<\/p>\n

    If you look at the holdings of RSP, all of the stocks in the fund are at 0.22%<\/strong>, since the fund is equal weighted.  This changes the dynamic of the performance of the fund, since no single holding can overtake the others, and performance is equalized.<\/p>\n<\/div>\n

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    How Equal Weighted Index Funds Perform<\/h2>\n<\/div>\n
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    The balance that you get with an equal weighted index fund<\/a> really comes into play when you chart out performance over time.  <\/p>\n

    Here is a side-by-side comparison of SPY and RSP from 2020 to 2025.<\/p>\n<\/div>\n

    \"SPY<\/span><\/div>\n
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    As you can see, they’re neck and neck, but the SPY normally-weighted index has had a slightly better return. And RSP has faired slightly better in the massive sell off over the last few days<\/a>.<\/p>\n

    However, here is a side-by-side comparison of SPY and RSP from 2005 to 2015. <\/p>\n

    The red line is RSP, the equal weighted portfolio, and the blue line is SPY, the standard capitalization weighted portfolio.<\/p>\n<\/div>\n

    \"10<\/span><\/div>\n
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    Over the this decade, RSP has returned 82.49% vs. 64.41% for SPY over the same period.<\/p>\n

    However, if you look at 2015 to 2020, this was arguably driven by technology stocks, and as such, the equal weighted fund underperformed the S&P 500:<\/p>\n<\/div>\n

    \"RSP<\/span><\/div>\n
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    The key to this success is balance. At the top, no single holding that may underperform can drag the portfolio down, while at the bottom, faster growing stocks get more weight than in a capitalization-based index – which worked out well for the last five years.  <\/p>\n<\/div>\n

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    The key is that smaller stocks provide as much growth as bigger stocks – which can work well during some periods, and work against you in other periods.<\/p>\n<\/div>\n

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    Drawbacks to Equal Weighted Index Funds<\/h2>\n<\/div>\n
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    The biggest drawback to equal weighted index funds are higher expense ratios. These funds have higher expenses because they have daily costs of maintaining balance in their portfolio. <\/p>\n

    While an ETF like SPY will only trade when major changes happen, equal weighted funds have to continually trim overweighted holdings to maintain the balance. Think of it like a daily portfolio rebalancing<\/a> act.<\/p>\n

    The second big drawback to equal-weighted funds is that the gap in performance vanishes as you move from large cap funds to mid and small cap funds.  In fact, the equal-weighted index funds are basically even at the mid cap and underperform at the small cap level.<\/p>\n

    And many of the equal weighted funds for mid and small cap stocks have closed.<\/p>\n<\/div>\n

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    Lessons on Equal Weighted Index Funds<\/h2>\n<\/div>\n
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    The biggest lesson learned is that, if you’re looking for a large cap index fund, you should consider an equal weighted fund – especially if you’re concerned about technology performance.  These funds are great for large cap investors because:<\/p>\n