What is the difference between equal weighting and market-cap weighting?

Most stock indices, and the funds that track them, are market-cap weighted: each company's weight is proportional to its market value, so the largest companies dominate. An equal-weighted portfolio gives every company the same share, however large or small it is. The same list of companies can behave quite differently depending on which method is used.

The formulas

With $N$ companies and market values $M_i$ :

w_i^{\text{market cap}} = \frac{M_i}{\sum_j M_j} \qquad w_i^{\text{equal}} = \frac{1}{N}

A simple illustration

An index of four companies:

Company	Value	Market-cap weight	Equal weight	Return
A	€600 bn	60%	25%	+20
B	€200 bn	20%	25%	0
C	€150 bn	15%	25%	+4
D	€50 bn	5%	25%	+8

R_{\text{market cap}} = 0.60 \times 20\% + 0.20 \times 0\% + 0.15 \times 4\% + 0.05 \times 8\% = 13\%

R_{\text{equal}} = 0.25 \times (20\% + 0\% + 4\% + 8\%) = 8\%

When the largest company leads, the market-cap-weighted index wins. When the smaller companies lead, the equal-weighted version does.

How they differ

	Market-cap weighted	Equal weighted
Largest companies	dominate	same weight as the rest
Tilt	toward large, often expensive companies	toward smaller and cheaper companies
Trading needed	almost none: weights follow prices	regular rebalancing back to equal
Costs	lowest	somewhat higher
Concentration	high when a few giants dominate	low

Equal weighting is effectively a combination of a tilt toward smaller companies and regular rebalancing: it sells what has risen and buys what has fallen.

What history shows

Over some long periods, equal-weighted versions of the S&P 500 have beaten the standard index, largely thanks to their tilt toward smaller and cheaper companies. In periods led by the largest companies — much of the 2010s and the early 2020s — they have lagged considerably. Neither method wins consistently.

How to use them

Market-cap weighting is the neutral choice: it holds the market as it is, at the lowest cost.
Equal weighting is a deliberate tilt away from the largest companies — one way to reduce index concentration — with different results in different market phases.

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