Market Weight vs. Equal Weight S&P 500 ETFs: What's the Difference?

Market Weight vs. Equal Weight S&P 500 ETFs: An Overview

Think of the S&P 500 like a pie chart: with a market weight ETF, the pie is broken up into slices based on market cap. With an equal-weight ETF, all the slices are the same size, regardless of the size of the company or sector. There are exchange-traded funds (ETFs) that track each of the two indexes, but even though they are basing their funds on the same companies, they can behave very differently.

In Jan. 2003, the S&P 500 Equal Weight Index (EWI) was created. As the name implies, this is an equal-weight version of the popular S&P 500 Index. Although both indexes are comprised of the same stocks, the different weighting schemes result in two indexes with different properties and different benefits for investors.

S&P 500 Market Weight ETFs

Similar to many stock indexes, the S&P 500 is a market capitalization-weighted index. The market capitalization of each stock is determined by taking the share price and multiplying it by the number of shares outstanding. The companies with the largest market capitalizations, or the greatest values, will have the highest weights in the index.

While many companies make up the S&P 500 index, the sector weight of an MWI (market value-weighted index) is calculated by summing up the individual weights of the companies that will make up that sector. The ETF of choice for the S&P 500 is the State Street SPDR S&P 500 (SPY).

The weight of a company in the index is equal to the market cap of that company divided by the total market cap of all the companies in the index. For example, as of July 11, 2023, the largest constituent of the S&P 500 index was Apple (AAPL) with a weight of 7.57%. The top 10 constituents of the S&P 500 index had a total weight of 30.24%.

S&P 500 Equal Weight ETFs

An equal-weighted index is just as it sounds. Every stock in the index has the same weight, regardless of how large or small the company is. Therefore, even Apple will have the same weight as the smallest company that is a constituent in the S&P 500.

The Invesco S&P 500 Equal Weight ETF (RSP) tracks the EWI and is the most commonly traded of the equal-weight ETFs. Like the EWI, Invesco's RSP is rebalanced quarterly.

For EWI, the sector weight is really a direct function of the number of companies in the sector. For example, if a sector contains 45 stocks, then the weight of the sector should theoretically be (45 / 500) x 100 = 9%.

The table below is a calculation of a hypothetical five-stock index, comparing a market weight versus an equal weight calculation.

The different weighting schemes of the S&P 500 EWI and S&P 500 will result in different sector exposures as well. 

The table below shows the difference in sector weight between the two indexes as of June 30, 2023. For example, in the MWI, the information technology sector had a weight of 28.3% but only 13.1% in the EWI. In the EWI, industrials held 15.5%, but its weight in the S&P 500 MWI is only 8.5%. Understanding the difference in sector make up will help to determine which index to use.

Special Considerations: Turnover and Volatility

There will be adjustments to reflect companies that have been removed and new companies that have been added to the index. There will also be adjustments made as companies in the index issue new shares or retire existing ones.

For the S&P 500 EWI, the goal is to maintain a portfolio of 500 equally-weighted stocks while keeping index turnover to a minimum. Each stock in the index is assigned a weight of 0.20% (1 / 500 x 100). The S&P 500 EWI is rebalanced quarterly to coincide with the quarterly share adjustment of the S&P 500, which takes place on the third Friday of each quarter.

Shares of stocks that performed well in the previous quarter will be sold and those that did relatively poorly will have to be bought to assure the equal weight, which is essentially a sell high, buy low strategy; however, the rebalancing will result in additional trading costs for the ETF.

Volatility tends to be higher on the S&P 500 EWI versus the S&P 500. According to the official S&P Dow Jones Indices fact sheet data, as of June 30, 2023, for the past five years, the annualized standard deviation on a total return basis was 20.76% for the S&P EWI versus 18.79% for the S&P 500. This reflects the fact that smaller-cap stocks are generally more volatile than larger companies, and the S&P 500 EWI has a greater tilt toward small-cap stocks than the S&P 500.

The Bottom Line

The S&P 500 can be sliced up in two ways: by market cap, which is the standard manner, or by equal weight, which is an additional way to view the index. When viewing the index by market cap, certain companies loom large and make up a greater percentage of the index's weight. This means that much of the performance of the index will be influenced by the performance of these large companies.

Conversely, with an equal weight index, every company is treated equally and performance does not depend on a few big names; however, this would increase the volatility of an equal weight index, as smaller companies generally have higher volatility, and this would be seen in the index through their equal weighting with the much larger companies. Depending on the goals of the investor and their risk tolerance, one index may serve a better purpose than the other.