Most investors think they own "the market" when they buy an S&P 500 fund. They don't. They own a handful of massive tech companies that happen to be dragging a few hundred other stocks along for the ride. If Nvidia or Apple has a bad day, your whole portfolio bleeds. That's the byproduct of market-cap weighting. But there is a different way to look at the US economy, and it involves the S&P 500 equal weighted index.
It's a simple concept. Instead of giving the biggest companies the most influence, you give every company the same seat at the table. Whether it's a trillion-dollar behemoth or a "small" $15 billion mid-cap, they each get 0.2% of the pie.
Why the S&P 500 equal weighted index is actually relevant right now
Concentration risk is at levels we haven't seen since the late 1990s. Honestly, it's getting a bit ridiculous. The top 10 companies in the standard S&P 500 now account for more than 30% of the entire index's value. That is a massive amount of eggs in one very specific, very tech-heavy basket. When you shift your gaze to the S&P 500 equal weighted index (often tracked by the ticker RSP), that concentration evaporates.
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You aren't just betting on the "Magnificent Seven." You're betting on the broader American economy. This includes industrial firms in Ohio, regional banks in the South, and healthcare providers in the Midwest.
If you look at the historical data from S&P Dow Jones Indices, the equal-weighted version has actually outperformed the standard market-cap-weighted index over very long stretches. Why? Because of the "size factor." Smaller companies—even the "smaller" ones in the S&P 500—tend to have more room to grow than companies that are already worth $3 trillion. It’s a lot easier for a $20 billion company to double than it is for Microsoft to become a $6 trillion entity.
The Rebalancing Act
The way the S&P 500 equal weighted index works is through a process called quarterly rebalancing. Every three months, the index managers sell the winners and buy the losers.
Think about that for a second.
It’s the literal definition of "buy low, sell high." If a stock like Meta skyrockets during the quarter, it might grow to represent 0.3% or 0.4% of the index. At the end of the quarter, the index sells that excess and redistributes the cash to the stocks that underperformed and now only make up 0.15%.
It feels counterintuitive to sell your winners. We’re told to "let our winners run." But in a diversified portfolio, this mechanical rebalancing forces a discipline that most human investors lack. It prevents you from becoming accidentally over-leveraged in a single sector just because it’s been hot lately.
Understanding the Sector Shift
When you move to an equal-weight model, the sector composition of your portfolio changes drastically. In the standard S&P 500, Information Technology is the undisputed king. It dominates. In the S&P 500 equal weighted index, technology takes a backseat.
- Financials and Industrials get a huge boost.
- Real Estate and Utilities, which are tiny slivers of the standard index, actually start to matter.
- You lose that extreme sensitivity to semiconductor cycles and AI hype.
This doesn't mean it's "better" in every environment. In years like 2023 or 2024, where a few tech giants accounted for almost all the market’s gains, equal weighting looked like a mistake. It lagged. Badly. But that's the price of diversification. You're trading the potential for astronomical gains in a few stocks for protection against a bubble popping.
The Valuation Gap Nobody Mentions
Right now, the "standard" S&P 500 looks expensive. If you look at the Forward Price-to-Earnings (P/E) ratio, it’s hovering well above historical averages. But that's skewed. It’s like looking at the average height of a room where three people are on stilts.
If you strip away the top 10 stocks and look at the S&P 500 equal weighted index, the valuation is much more reasonable. You’re often buying the "average" S&P 500 company at a significant discount compared to the tech leaders. For a value-conscious investor, this is the most compelling argument for the switch. You’re essentially buying the same quality of companies—these are still S&P 500 firms, after all—but you’re paying less per dollar of earnings.
Is there a catch?
Of course. There’s always a catch in finance.
Because the index rebalances every quarter, it has higher turnover. Selling and buying 500 stocks four times a year creates trading costs. In a standard market-cap index, you rarely have to trade unless a company is added or removed. While modern ETFs like the Invesco S&P 500 Equal Weight ETF (RSP) have managed to keep their expense ratios low (around 0.20%), it’s still higher than a dirt-cheap Vanguard S&P 500 fund that might cost 0.03%.
Then there’s the tax hit. If you hold this in a taxable brokerage account, that quarterly rebalancing could trigger capital gains taxes. It’s usually more "tax-efficient" to hold a cap-weighted fund where you just sit on your winners forever.
Performance in Different Market Cycles
History is a funny thing. From 2003 to 2006, the S&P 500 equal weighted index absolutely crushed the standard index. Why? Because the tech bubble had burst and the "boring" parts of the economy were recovering. Conversely, during the "dot-com" run-up or the post-COVID tech surge, equal weighting felt like an anchor.
- During Bull Markets: If the rally is broad-based, equal weight wins.
- During "Narrow" Markets: If only 5 stocks are going up, equal weight loses.
- During Crashes: Equal weight can sometimes fall harder because smaller, more cyclical companies (like regional banks or manufacturers) often get hit worse than "fortress" balance sheets like Google or Johnson & Johnson.
How to actually use this information
You don't have to go "all in" on one or the other. Smart investors use the S&P 500 equal weighted index as a diagnostic tool. Compare the performance of the SPY (cap-weighted) and RSP (equal-weighted).
If SPY is going up but RSP is flat or down, the market is "thin." It means only the big guys are winning. That's usually a sign of a fragile market. If both are rising together, the rally has "breadth," which is much healthier.
Actionable Steps for Your Portfolio
- Check your concentration. Look at your brokerage statement. If you own an S&P 500 index fund AND a "Total Stock Market" fund AND a "Large Cap Growth" fund, you likely have 40-50% of your money in the same 10 tech stocks. You aren't as diversified as you think.
- Consider a 50/50 split. Some advisors suggest putting half your large-cap allocation into a cap-weighted fund and half into an equal-weighted fund. This gives you exposure to the momentum of the giants while maintaining a floor of diversification in the "other 490" stocks.
- Use it in tax-advantaged accounts. To avoid the tax drag of rebalancing, hold your equal-weight funds in an IRA or 401(k).
- Watch the P/E ratios. When the valuation gap between the cap-weighted S&P 500 and the S&P 500 equal weighted index gets historically wide, it's often a signal that a "reversion to the mean" is coming. It might be time to trim the winners and buy the equal-weight laggards.
The S&P 500 isn't a monolith. It's a collection of 500 distinct businesses. If you're tired of your net worth being tied to the daily mood swings of a few CEOs in Silicon Valley, the equal-weight approach is the most logical exit ramp. It’s boring, it’s mechanical, and it’s mathematically sound. Sometimes, that’s exactly what a portfolio needs.