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Investor Insights: Is it time to consider equal weight ETFs in your portfolio?
ETFs 7 minutes to read
Note: This is marketing material. This article is not investment advice, capital is at risk.
For other ideas about starting your portfolio I had a look at the Ray Dalio All-Weather Portfolio, and had a look at a simple DIY diversified approach that incorporates gold.
Equal weight Exchange Traded Funds (ETFs) are enjoying a strong year as several of the largest stocks on major indices that have driven returns in recent years have lagged.
Equal weight ETFs give every stock in the underlying index the same share, rather than market-weight ETFs that resemble the core index itself. For the S&P 500, where the bulk of equal weight index ETF investment is centred, this means each company in the index is weighted at 0.2%.
The oldest equal weight ETF is the Invesco S&P 500 Equal Weight ETF (RSP), which has seen strong inflows this year.
For UK investors the Xtrackers S&P 500 Equal Weight UCITS ETF is more accessible and has USD (XDEW) and sterling-denominated (XDWE) versions. XDWE has returned over +14.35% in the year to date, outperforming a representative market cap weighted ETF like the iShares Core S&P 500 (Acc) UCITS ETF, which has risen +12.30% YTD.
A large part of this lies in the performance of the Magnificent 7 group of companies that have powered US stock market gains and account for around one third of the S&P 500. This means they exert a huge power on overall index performance. They’ve basically been flat this year with the MAGS ETF barely off the 67.50 level.
Investors have been drawn to equal weight ETFs in part due to growing concerns about concentration risk in US markets – the top 10 companies make up about 40% of the index and are very much tied to the AI and therefore mounting concerns about bubble risks and overspending by hyperscalers.
While the S&P 500 has perhaps some of the most liquid equal weight ETFs of their kind, there are other options for investors. For example, the Invesco MSCI World Equal Weight Acc UCITS ETF (MWEP hedged GBP, MWEQ priced in USD) offers broad exposure to global equities in the MSCI World index. There is also the Invesco MSCI Europe Equal Weight UCITS ETF to gain exposure to large and mid-cap companies across developed Europe.
About Equal Weight ETFs
Equal-weight ETFs take a different approach to traditional index investing. Rather than allocating more capital to the largest companies, they give each constituent a similar portfolio weight. This reduces dependence on a small number of market leaders and increases exposure to a broader range of businesses. The trade-off is that investors may sacrifice some upside when mega-cap stocks dominate returns and may face slightly higher costs due to regular portfolio rebalancing.
Most equity indices, such as the FTSE 100, S&P 500, and MSCI World, are market-cap weighted, meaning the largest companies get the biggest allocation.
An equal-weight ETF gives every constituent the same weight. For example, in an equal-weight S&P 500 ETF, each stock starts at around 0.2% of the portfolio regardless of whether it is Apple or a much smaller constituent. The fund periodically rebalances back to equal weights.
Why investors like equal-weight ETFs
1. Less concentration risk
A cap-weighted index can become dominated by a handful of mega-cap stocks. Equal weighting reduces dependence on the biggest names. For example, the largest few US technology stocks can represent a very large share of the S&P 500, whereas an equal-weight version spreads risk much more evenly.
2. Better diversification
Thousands of stocks contribute meaningfully to returns instead of only the largest firms. This can provide broader exposure across sectors and companies.
3. Exposure to a size factor
Equal-weighting naturally increases allocation to medium-sized and smaller large-cap companies. Historically, periods where smaller companies outperform larger ones have often favoured equal-weight indices.
4. "Buy low, sell high" rebalancing effect
Equal-weight funds periodically trim winners and add to laggards during rebalancing. This creates a systematic contrarian discipline that some investors find attractive.
Risks and things to consider
1. Bigger exposure to weaker companies
In a cap-weighted index, successful companies naturally become a larger share of the portfolio.
Equal-weighting forces you to allocate the same amount to weaker or less profitable businesses as to stronger ones.
2. Can underperform in mega-cap-led markets
When a small group of large companies drives market returns (for example, AI-related US tech stocks in recent years), equal-weight funds may lag because they own less of those winners.
3. Higher turnover
Equal-weight ETFs need regular rebalancing, which means more trading, slightly higher costs and potentially greater tracking differences.
4. Often more cyclical
Equal-weight portfolios generally have more exposure to industrials, financials and mid-caps, which can increase volatility during economic downturns.
5. Equal weight is not "safer"
It is a different factor exposure, not necessarily a lower-risk one. Although the ETF itself is passive, equal weighting is effectively an active bet that smaller companies will do relatively well, that market concentration will eventually reverse and that broader market participation will improve.
For other ideas about starting your portfolio I had a look at the Ray Dalio All-Weather Portfolio, and had a look at a simple DIY diversified approach that incorporates gold.