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Equal-weight index

An index that gives every constituent the same weight regardless of size, which tilts the exposure toward smaller members and requires regular rebalancing trades.

Equal weighting removes the concentration of market-cap-weighting, but it is not free. Because prices drift apart, the fund must sell winners and buy losers at each rebalance to restore equal weights, which creates turnover, trading costs, and a systematic small-cap and value tilt.

The relative performance of an equal-weight version against its cap-weighted parent is a widely watched gauge of how narrow a rally is.

Example: in a 500-stock equal-weight index every name is 0.2%. The largest company, 7% of the cap-weighted version, has 1/35th of that influence, so a 30% fall in it costs the equal-weight index 0.06% instead of 2.1%.

Related: market-cap-weighting, free-float-weighting, index-rebalance, tracking-error, expense-ratio

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