Unweighted Index

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Unweighted (Equal-Weight) Index

What it is

An equal-weight (or unweighted) index assigns the same importance to every stock in the index or portfolio, regardless of company size or market value. Each constituent represents an identical percentage of the index, so the smallest and largest companies carry equal statistical weight.

Key takeaways

  • Equal-weighting treats each stock the same, unlike market-cap-weighted indexes that give larger companies greater influence.
  • Equal-weight indexes increase exposure to smaller-cap stocks, which can boost short-term returns but also increase volatility.
  • Maintaining equal weights requires regular rebalancing, which typically leads to higher turnover and trading costs.
  • Equal-weight funds can reduce concentration risk when large sectors or companies decline.

How it differs from other weighting methods

  • Market-cap-weighted indexes (e.g., the S&P 500) weight constituents by total market value, so large companies have bigger impacts on index performance.
  • Price-weighted indexes (e.g., DJIA) weight stocks by share price.
  • Equal-weighting flips that logic: each stock contributes the same percentage to performance, shifting exposure toward smaller names within the universe.

Performance characteristics

  • Equal-weight indexes often benefit from the historical outperformance of smaller-cap stocks, which can lead to stronger short-term returns versus market-cap-weighted counterparts.
  • Over longer horizons, performance can converge or reverse; there are periods when market-cap-weighted indexes outperform equal-weighted ones.
  • Example comparison: in one observed one-year period, the S&P 500 Equal Weight Index outpaced the market-cap S&P 500. Over a longer multi-year (10-year annualized) span, the traditional S&P 500 showed higher returns than its equal-weight counterpart.

Examples of equal-weight funds and indexes

  • S&P 500 Equal Weight Index — an equal-weight version of the S&P 500 (introduced by S&P Global).
  • Invesco S&P 500 Equal Weight ETF (RSP) — equal exposure to all S&P 500 constituents.
  • Invesco Russell 1000 Equal Weight ETF — based on the Russell 1000 Equal Weight Index.
  • First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW) — equal-weight approach to the NASDAQ-100.

Risks and costs

  • Higher turnover: Frequent rebalancing is required to maintain equal weights, causing more trading.
  • Higher trading costs and potential tax consequences compared with passive market-cap-weighted funds.
  • Greater volatility due to amplified small-cap exposure, though this can also offer higher return potential.
  • Diversification benefit: reduces dominance of a few mega-cap stocks and mitigates single-sector concentration risk.

Who it may suit

Investors who want broader exposure to smaller constituents within a given index, seek reduced concentration in mega-cap stocks, and are comfortable with potentially higher volatility and trading costs may consider equal-weight strategies as part of a diversified portfolio.

Conclusion

Equal-weight (unweighted) indexes provide an alternative to market-cap weighting by giving every stock equal influence. They change the risk/return profile—often increasing small-cap exposure, turnover, and short-term return potential—so investors should weigh the benefits of diversification and potential returns against higher costs and volatility.