Equal Weighting: the antidote to concentration or another risk in disguise?

Most equity benchmarks adopt a market-cap weighting, where the largest companies, such as those in the magnificent seven, have significant influence on the overall composition, characteristics and concentration of the benchmark. This approach reflects the total investable opportunity set and ensures liquidity and scalability, which is one of the reasons it has become ubiquitous. In contrast, equal-weight benchmarks assign the same weight to every stock, regardless of the size. This means a small-cap minnow has as much influence on the benchmark as a mega-cap behemoth. This can tilt the benchmark exposure towards smaller and more volatile names and significantly alter its overall sector and financial characteristics.

On benchmark turnover

An often overlooked but important outcome of an equal weighting scheme is benchmark turnover – essentially, the amount of trading required to maintain the weighting scheme.  

As stock prices change through time, the value and weight of each stock in the benchmark shifts; equal-weight benchmarks must rebalance more frequently than their market-cap counterparts to maintain equal weighting. For example, turnover for S&P 500 equal weight has been over five times higher than for the standard market-cap weighted S&P 500 over the last decade.¹

Investing in style

Whilst the difference between market cap and equal-weight benchmarks may seem purely structural, the differing methodologies result in different financial characteristics with exposures to different equity ‘factors’, sometimes known as investment ‘styles’.

For example, market-cap weighted benchmarks have more weight in the largest companies; these companies typically on average have stronger recent earnings growth and price outperformance and so are inherently more trend-following than equal-weight benchmarks. These characteristics of market-cap benchmarks result in greater momentum style exposure compared to equal-weight benchmarks.

On the other hand, equal-weight benchmarks can significantly boost exposure to smaller companies, often with cheaper valuations, lower growth expectations, and increased volatility. 

Style chart source: Style Research as at 31st Dec 25.

Equal-weight benchmarks can outperform during periods of broader market participation, when smaller companies and value factors are rallying, however, these benefits can come with higher volatility and risk. The value and small size factors can underperform for extended periods when there is strong momentum performance that is concentrated in a narrow, large-cap section of the market.

It is important to consider the magnitude of these exposures in different benchmarks, so it’s not just a question of the direction, but also the size of any biases introduced by benchmark choice.

From theory to allocation

The choice of benchmark is not just theoretical. It has real consequences for strategy design, portfolio construction, risk exposure and long-term performance. 

Market-cap benchmarks are efficient, liquid and cheap to implement. Their low turnover helps minimize transaction costs and capital gains distributions. However, market-cap benchmarks are characterised by structural concentration and a bias toward large-cap growth and momentum, and potentially leave investors underexposed to other factors, such as value, quality, low volatility and small size.

On the other hand, equal-weight benchmarks can give exposure towards smaller, cheaper stocks that are less in vogue, but at the price of higher turnover and transaction costs, particularly for larger strategies where trading capacity matters. 

The potential benefits of an Enhanced Index approach

For investors seeking diversification, overlaying an active strategy on top of a chosen benchmark which boosts underrepresented factor exposures can be a compelling strategy. For example, constructing a portfolio using a market-cap benchmark as a starting point but tilting systematically towards value, quality, and momentum stocks has the potential to deliver outperformance over the long term. This is the approach we use for our Enhanced Index portfolios.

Final thoughts…

There are multiple viable solutions to reducing concentration and constructing a portfolio with diversified factor exposure in a cost-effective manner. The key to all of them is to understand that benchmark design choices embed factor bets, even for strategies which passively track those benchmarks. It's not just what you invest in, it’s how you weight those positions that defines your exposure to systematic sources of return.

In a world full of hidden portfolio tilts, do you prefer the simplicity of implicit factor exposure, or the precision of intentional factor design?