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

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 off the same companies, they can behave very differently.

In January 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.

Key Takeaways

  • It’s possible to trade ETFs that represent both the traditional S&P 500 index and the newer equal weight S&P 500 index.
  • The normal, market-weighted, S&P 500 does need to be periodically adjusted, but not rebalanced—equal weight ETFs need both.
  • Equal weight ETFs offer more protection if a large sector experiences a downturn, and due to the equal weighting, small sectors underperforming can offset losses more than they would in a market weight ETF.
  • Just because these two types of ETFs hold the same basket of companies does not mean they will perform similarly.

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 Jan. 18, 2022, the largest constituent of the S&P 500 index was Apple (AAPL) with a weight of 6.83%. The top ten constituents of the S&P 500 index comprised 28.78%.

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.