Research

Worth the WeightContributors
Tim Edwards, Ph.D.
Head ofIndex Investment Strategy
tim.edwards@spglobal.com
Anu R. Ganti, CFA
Head of U.S.
Index Investment Strategy
anu.ganti@spglobal.com
Hamish Preston, CFA
Head of U.S. Equities
hamish.preston@spglobal.com“It takes 500 small details to add up to one favorable impression."
Cary Grant
The S&P 500® Equal Weight Index has outperformed the S&P 500®
over more than two decades of live history, with a similar long-term
rate of excess returns observed over a hypothetical back-tested
history extending back to 1970 (see Exhibit 1). These observations
are not new, but an equal weight approach to large-cap U.S. equities
may be of particular interest in times such as the present, when theequity markets are at high levels of market concentration relative tohistory.
In the context of the current market dynamics, this paper summarizes
a wide range of observations on the potential sources and drivers ofrelative performance in the S&P 500 Equal Weight Index—ranging
from market concentration to sector, factor and single-stock
perspectives.
Exhibit 1: The S&P 500 Equal Weight Index Outperformed over
the Long Term
500
450

Index Level

400
350
300
250
200
150
100
50

S&P 500

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

0

S&P 500 Equal Weight Index

Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. Index performance based on total
return in USD. Indices were rebased to 1 on Dec. 31, 1970. The S&P 500 Equal Weight Index was
launched Jan. 08, 2003. Past performance is no guarantee of future results. Chart is provided forillustrative purposes and reflects hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information regarding the inherent limitations associatedwith back-tested performance.

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The Current Market Context
The U.S. equity market has, among other features, been recently characterized by strongly
extended price trends and the relative dominance of a few mega-cap companies. This could
make equal weight strategies particularly interesting because, first, trends in concentration andmomentum tend to reverse at some point (even if it is hard to identify when that will occur) andsecond, because diversification strategies can be more important when markets are relatively
concentrated.
There are numerous ways to see that the U.S. equity market is unusually concentrated atpresent.1 Particularly germane to comparisons between equal- and market-cap-weighted
indices is that as of June 28, 2024, the (unweighted) average market capitalization of the S&P
500 constituents was USD 96.3 billion dollars but, in contrast, the index-weighted average
market capitalization was USD 998.6 billion dollars. In other words, a strategy tracking the
S&P 500 would—on a portfolio-weighted basis—have an average market capitalization morethan ten times larger than an equally weighted one.2
Using this ratio (between the weighted and unweighted average market cap) to represent“concentration,” we can see that concentration has risen sharply over the past 10 years,
recently reaching extremes not seen for more than half a century (see Exhibit 2a).
Exhibit 2a: U.S. Equity Market Concentration Reached the Highest in a Half-Century
S&P 500 Concentration Measure

11
10
9
8
7
6
5
4
3
2
1

2024

2022

2020

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

0

Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. Concentration is calculated as the ratio of index weighted average company
total market capitalization to the (unweighted) average total market capitalization among constituents. Past performance is no guarantee of
future results. Chart is provided for illustrative purposes.

1This is not solely a U.S. phenomenon, see Authers, John, “Market Herding Is Everywhere, Not Just the U.S.” Bloomberg’s Points of Return,
February 2024. See also Inker, Ben and John Pease, “Magnificently Concentrated,” GMO, Q1 2024.

2

A little algebra and the definition of capitalization-weighted indices shows that this measure is almost identical to the “adjusted HHI”
introduced by Anu Ganti & Craig J. Lazzara in “Concentrations within Sectors and Implications for Equal Weighting,” S&P Dow Jones
Indices LLC, February 2022—although Exhibit 2 is based on full market capitalization (opposed to free float).

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Changes in market concentration naturally relate to the performance of equal-weighted indices,because when the largest stocks outperform, the market becomes more concentrated in thosenames, and, at the same time, outperformance by the largest names will mean that marketcap-weighted indices will outperform equal-weighted ones (all else being equal). Conversely, if
market concentration were to decrease, then equal-weighted indices would be expected tooutperform.3 Evidencing this point, Exhibit 2b overlays the market concentration shown in
Exhibit 2a with the ratio of the total return versions of the S&P 500 Equal Weight Index and
S&P 500. Their negative association is starkly visible. (Note: when the series represented inblue is declining, the equal weight index is outperforming.)

11

2.5

S&P 500 Concentration Measure

10
9

2

8
7

1.5

6
5
1

4
3

0.5

2
1
0

S&P 500 Equal Weight Index Relative to S&P 500(Rebased to December 1970)

Exhibit 2b: Equal Weight Relative Performance and Concentration Trends

0Market Concentration (LHS)

Ratio of S&P 500 Equal Weight Index TR to S&P 500 TR (RHS)

Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. Index performance based on total return indices in USD. The S&P 500
Equal Weight Index was launched Jan. 08, 2003. All data prior to index launch date is back-tested hypothetical data. Past performance is no
guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the
Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested
performance.

Whether and when these trends might in fact reverse may be connected to a wider
phenomenon in U.S. equities, namely momentum. More specifically, the recent
outperformance of the very largest stocks is part of a broader strength in the “momentum”
factor in U.S. equity performances, particularly over the last year. To see how extreme thetrends have become, Exhibit 3 shows the 12-month relative performance (vs the S&P 500) of
the S&P 500 Momentum Index—an index comprising the top quintile of S&P 500 constituentswith the strongest positive price trends.4 The momentum index outperformed the S&P 500 by
more than 30% in total return terms as of June 28, 2024. This extreme level of relative3

See Edwards, Tim, “Higher Concentrations in the S&P 500 Could Lead To Equal Weight Outperformance,” S&P Dow Jones Indices,
September 2018.

4

The full methodology for the S&P Momentum Indices is available on our website.

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July 2024

performance is only matched by the excess of exuberance that accompanied the “dot-com
bubble” of the late 1990s and which, notably, not long thereafter saw a just as sharp reversal.
Exhibit 3: Momentum Was also Historically Extended in the S&P 500

12-Month Excess Return of S&P 500
Momentum Index versus S&P 500

40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

2021

2024

Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. Index performance based on total return in USD. The S&P 500 Momentum
Index was launched Nov. 18, 2014. All data prior to index launch date is back-tested hypothetical data. Past performance is no guarantee of
future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance
Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

In a later section, we will also show further evidence of the relationship between the
momentum factor and the relative performance of equal weight indices; at present it suffices tosay that they are also naturally and inversely related, which adds emphasis to the potential
importance of monitoring the performance of momentum strategies when assessing thepotential merits of an equal weight approach.
As a final remark on the potential relevance of an equal weight approach in the current
environment, consider that if the S&P 500 continues to be driven almost exclusively by a selectfew large names, then the benchmark may begin to act more in line with the idiosyncratic (asopposed to systemic) risks that those large names are most sensitive to. One way in which
this may already be manifesting can be found in the sensitivity to longer-dated interest rates.
As pointed out recently in the Wall Street Journal,5 the correlations between daily changes inthe benchmark 10-year U.S. Treasury yield and either the S&P 500 or its equal-weighted
version are normally near-equivalent, but they have diverged recently. Exhibit 4 shows thetrailing 100-day correlations of each index to the benchmark yield from June 2001 to June
2024.

5

Mackintosh, James, “Big Tech Companies Unplug Stock Market From Reality,” The Wall Street Journal, June 4, 2024.

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Exhibit 4: Correlations to 10-Year Treasury Yields Have Recently Diverged
1.00

Correlation to 10-Year Treasury Yield

0.80
0.60
0.40
0.20
0.00
-0.20
-0.40

S&P 500 Equal Weight Index

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

-0.60

S&P 500

Source: S&P Dow Jones Indices LLC, Federal Reserve Bank of St. Louis. Data as of June 28, 2024. The S&P 500 Equal Weight Index was
launched Jan. 08, 2003. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects
hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding theinherent limitations associated with back-tested performance

Taken altogether, we have an unusually high level of concentration in U.S. equities,
accompanied by a range of unusually stretched trends in single-stock performance, and earlysigns of a potential divergence in the risk characteristics of the equal- and market-capweighted versions of the S&P 500. One way to manage the risks of market concentration in a
few select mega-cap names is to rebalance away from these outperformers and reap the
potential diversification benefits of an equal-weighted approach. Thus, an examination of the
S&P 500 Equal Weight Index may prove timely. Any analysis of the current environment might
be bolstered with further evidence from the next section on longer-term historical trends.

Historical Outperformance of Equal WeightAs introduced in Exhibit 1, the S&P 500 Equal Weight Index has demonstrated admirable
performance in absolute and relative terms over the long term, rising by an annualized 11.58%
since it launched in January 2003 to the end of June 2024.6 It has outperformed not only themarket-cap-weighted S&P 500, but also the smaller-cap S&P MidCap 400® and S&P
SmallCap 600® during the full period. Exhibit 5 details the long-term degree of outperformanceversus each index, as well as more recent statistics.

6

Source: S&P Dow Jones Indices LLC as of June 28, 2024, based on total returns starting Jan. 31, 2003. See Preston, Hamish,“Celebrating 20 Years of the S&P 500 Equal Weight Index,” S&P Dow Jones Indices LLC, January 2023.

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Exhibit 5: S&P 500 Equal Weight Index Total Return and Comparisons
Index

Full Period

5-Year

10-Year15-Year

20-Year

11.58

11.57

10.92

14.23

10.25

versus S&P 500

0.39

-3.19

-2.04

-0.38

0.05

versus S&P SmallCap 600

0.77

3.85

2.12

1.56

0.74

versus S&P MidCap 400

0.42

1.20

0.94

1.01

0.22

Total Return (Annualized, %)S&P 500 Equal Weight
Relative Total Return (Annualized, %)Source: S&P Dow Jones Indices LLC. Data from Jan. 31, 2003, to June 28, 2024. Past performance is no guarantee of future results. Tableis provided for illustrative purposes.

The relative underperformance of the S&P 500 Equal Weight Index versus the S&P 500 overshorter periods is connected to several of the themes covered previously. Over the longer
term, the index’s outperformance has historically motivated a range of analyses of the sourcesand drivers of relative performance of equal weight indices, which the next few sections will be
dedicated to summarizing. We shall consider, in order:–

The role of sector weights;–

The factor perspectives of size and momentum;–

Single stock selection and the role of cross-sectional skew; and–Comparisons with actively managed U.S. equity mutual funds.

Equal Weight and Sectors
The sector weights of an equity index can have significant explanatory power for its absoluteand relative performance, particularly when sector performances are markedly different.
Although it contains the same stocks from the same sectors, because it does not weight themin proportion to their market capitalization, the S&P 500 Equal Weight Index can havesignificantly different sector weights than the S&P 500.
Exhibit 6 summarizes the current sector weights and the historical sector “active share”7 in the
S&P 500 Equal Weight Index compared to the market-cap-weighted S&P 500. Over its live
history, the equal weight index had an average sector active share of 17%, of which thebiggest relative overweight was in Industrials, where it had an average of 7% more than thebenchmark, and the largest underweight was an average 6% differential in the Information
Technology sector. The current sector active share (as of Q2 2024) was 25%, over one-half of
7

The sector “active share” is calculated at each point in time by summing the absolute differences in sector weights of the two indices anddividing the result by two. Two indices with no sector overlap will have a sector active share of 100%; two indices with the same sector
weights will have a sector active share of 0%.

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which was created by a 19% underweight in Information Technology and a 7% overweight in
Industrials.
Exhibit 6: Current Sector Weights and Historical Sector Active Share of the S&P 500
Equal Weight Index and the S&P 500
Current Weights (as of Q2 2024, %)Sector

S&P 500 Equal
Weight Index

S&P 500

Difference

Absolute
Difference

Communication Services

3.9

9.3

-5.5

5.5

Consumer Discretionary

10.4

10.0

0.5

0.5

Consumer Staples

7.5

5.8

1.8

1.8

Energy

4.6

3.6

0.9

0.9

Financials

14.4

12.4

2.0

2.0

Health Care

12.4

11.7

0.7

0.7

Industrials

15.6

8.1

7.4

7.4

Information Technology

13.4

32.4

-19.0

19.0

Materials

5.5

2.2

3.4

3.4

Real Estate

6.2

2.2

4.0

4.0

Utilities

6.1

2.3

3.8

3.8

Sum

100

100

0

49

30

Sector Active Share (%, Quarterly)

25

20

15

10

5

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0

Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. The S&P 500 Equal Weight Index was launched Jan. 08, 2003. All dataprior to index launch date is back-tested hypothetical data. Chart and table are provided for illustrative purposes and reflect hypothetical
historical index weights. Please see the Performance Disclosure at the end of this document for more information regarding the inherent
limitations associated with back-tested data.

Given the significant sector weight differences, it is tempting to suppose that they were asignificant driver in the long-term outperformance of the S&P 500 Equal Weight Index.
Surprisingly perhaps, while sector weightings have remained an important driver of short-term
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relative performance, their importance was almost immaterial in the long term. Instead, asector-based return attribution for the cumulative 92% excess return of the S&P 500 Equal
Weight Index over its live history shows that all of its outperformance came from weighting
equally within each sector (intra-sector weighting).8 In fact, we might say “more than all” of theoutperformance, since the impact from sectoral weightings (cross sector weighting) alone
would have been expected to result in underperformance by a cumulative 45% over the same
period. Exhibit 7 summarizes the contributions to outperformance from cross sectoral
weightings, and within-sector weightings, respectively.
Exhibit 7: Intra-Sector Weighting Delivered the Most Benefit
Information Technology (-)

Cross-Sector Weighting

Consumer Discretionary (-)

Intra-Sector Weighting

Communication Services (-)
Real Estate (-)
Energy (+)
Consumer Staples (+)
Utilities (+)
Materials (+)
Health Care (+)
Industrials (+)
Financials (+)
S&P 500 Equal Weight (+)-150.0%-100.0%-50.0%

0.0%
50.0%
Attribution

100.0%

150.0%

200.0%

Source: S&P Dow Jones Indices LLC, FactSet. Data from March 31, 2003, to June 28, 2024. Index performance based on total return indicesin USD. Real Estate and Communication Services sectors underwent GICS® changes in August 2016 and September 2018, respectively.
Data points for the Financials sector reflect the inclusion of Real Estate companies through Aug.31, 2016, and exclusion thereafter. Consumer
Discretionary and Information Technology were affected as some stocks within these sectors moved to Communication Services. Past
performance is no guarantee of future results. Chart is provided for illustrative purposes.

While the impact of equal weighting within each sector was positive in 7 of the 11 sectors,
Information Technology was a notable exception, where the equal weight index’s underweightin both the sector and the sector’s largest names detracted from performance. Meanwhile, theindex’s equal-weighted approach within the Financials, Industrials and Health Care sectors
was responsible for the lion’s share of historical outperformance.9

8

See also Preston, Hamish, “Equally Weighting within Sectors: Impact and Potential Applications,” S&P Dow Jones Indices LLC, April 2023.

9

For a more thorough investigation of the impact of equal weighting within and across U.S. equity sectors, see Ganti, Anu R., and Craig J.
Lazzara, “Concentration within Sectors and Its Implications for Equal Weighting,” S&P Dow Jones Indices LLC, Feb. 7, 2022.

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Factors Driving Equal Weight Outperformance
Simple in nature, an equal weight index is defined by a rebalancing schedule determining thefrequency at which its constituents should be rebalanced to equal weights.10 This leads to two
anticipated factor exposures: a higher exposure to smaller market-cap stocks (the “size” factor)
and an anti-momentum factor exposure with a time horizon that is aligned with the rebalancing
frequency.
Exhibit 8 illustrates the weight of companies of different sizes in each index. For example,
somewhat intuitively, the equal weight index has close to 80% of its weight in the smallest 400
companies of the S&P 500, compared to only 27% for the market-cap-weighted benchmark.
Exhibit 8: The S&P 500 Equal Weight Index Had Smaller Size Exposure
100%
90%
80%
80%
69%

Weight

70%
56%

60%
50%
40%

34%
27%

30%
20%

20%

20%
10%

10%

7%
0%

10%
2%

1%

0% 2%

Bottom 100

Bottom 50

Bottom 10

2%0%Largest WeightTop 10Top 50
S&P 500

Top 100

Bottom 400

S&P 500 Equal Weight Index

Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. Chart is provided for illustrative purposes.

In contrast to sectoral weightings, smaller size exposure has proved to be a predominant longterm driver of the Equal Weight’s outperformance. One way to illustrate this is to compare thereturns of the equal weight index to those of a hypothetical “Size Match” portfolio, constructedfrom the unique combination of the S&P 500 and S&P MidCap 400 that results in the sameindex-weighted average market cap as the S&P 500 Equal Weight Index.11

10

The S&P 500 Equal Weight Index rebalances on a quarterly basis. For more details, see the methodology, available athttps://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-us-indices.pdf

11

Based on an annual rebalance of the “Size Match” portfolio. For details of the calculation, see Edwards, Tim, Craig J. Lazzara and Hamish
Preston, , “Outperformance in Equal-Weight Indices,” S&P Dow Jones Indices LLC, Jan. 5, 2018.

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Exhibit 9: Size Can Explain a Significant Proportion of Long-Term Returns
3,500

Cumulative Relative Performance

3,000
2,500
2,000
1,500
1,000
500

Size Match Porfolio

S&P 500 Equal Weight Index

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

S&P 500

The Size Match Portfolio is a hypothetical portfolio.
Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. Hypothetical Size Match portfolio reflects a combination of S&P 500 and
S&P MidCap 400 such that the hypothetical portfolio’s index-weighted average constituent size matches that of the S&P 500 Equal WeightIndex. The hypothetical portfolio rebalances annually at each year-end. For more information, see “Outperformance in Equal Weight Indices,”
S&P Dow Jones Indices LLC. Indices were rebased to 100 on Dec. 31, 1991. The S&P 500 Equal Weight Index was launched Jan. 08, 2003.
All data prior to index launch date is back-tested hypothetical data. Past performance is no guarantee of future results. Chart is provided forillustrative purposes and reflects hypothetical historical performance. See the Performance Disclosure at the end of this document for more
information regarding the inherent limitations associated with back-tested performance.

As well as the similar long-term performance demonstrated above, the R2 value between theequal weight index and hypothetical Size Match portfolio trailing 12-month excess returns wasa significant 0.58. So, “size” may explain a reasonable proportion of the shorter-term returns,
too.
However, size was not the only factor determining Equal Weight’s outperformance; the longtimescale of the chart above, combined with the fact that two of the series ended in very similarplaces, risks disguising a genuine return differential in the short and medium term. For
example, the equal weight index’s 12-month total return relative to the Size Match portfolio
over the period ranged from -26% to 16%. In other words, even if the size factor might explain
around one-half of excess returns, that still leaves plenty of explaining left to do. The impact of
one other factor is particularly clear in the data. It arises through the act of regularly
rebalancing, which requires equal-weight indices to sell relative winners (which will have grownin weight) and purchase relative losers (which will have fallen in weight) at each rebalance.
This is the opposite of momentum-based strategies, which buy winners and sell losers.12
Exhibit 10 demonstrates that a significant proportion of the unexplained performance may
come from a negative association to momentum, with a statistical R2 value of 0.5 between the12

See Ganti, Anu R., “Mean Reversion and Momentum,” S&P Dow Jones Indices LLC, May 11, 2021.

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excess returns of the S&P 500 Equal Weight Index relative to the Size Match portfolio, and theexcess returns of the S&P 500 Momentum Index relative to the S&P 500. In other words,
momentum effects might explain around one-half of the variation in Equal Weight’s relative
performance that was not explained by size effects.
Exhibit 10: Residual Impact of Momentum on Equal Weight Performance
S&P 500 Equal Weight Index 12-Month Excess TR(Relative to Size Match Portfolio)

30%

20%

10%

0%

-10%
R² = 0.4904
-20%

-30%
-40%

-30%

-20%

-10%
0%
10%
S&P 500 Momentum Index 12-Month Excess TR(Relative to S&P 500)

20%

30%

40%

The Size Match Portfolio is a hypothetical portfolio.
Source: S&P Dow Jones Indices LLC. Data as of June 28, 2024. Index performance based on total return in USD. The S&P 500 Equal
Weight Index was launched Jan. 08, 2003. The S&P 500 Momentum Index was launched Nov. 18, 2014. All data prior to index launch date isback-tested hypothetical data. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects
hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding theinherent limitations associated with back-tested performance.

As well as the expected size and anti-momentum characteristics, Equal Weight has additional
factor tilts that can vary over time. Historically (and presently, see Exhibit 11), the index has
also tended to have a tilt toward value and a related tilt toward stocks with higher dividend
yields relative to the S&P 500.

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Exhibit 11: The S&P 500 Equal Weight Index’s Factor Tilts Relative to the S&P 500
Low Volatility

Small Size

Momentum

Quality

Value

Dividend

High Beta

Source: S&P Dow Jones Indices LLC, FactSet. Chart reproduced from the June 2024 edition of the monthly S&P 500 Equal Weight Sector
Dashboard. Data as of June 28, 2024. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Stock Selection and Equal Weighting"Big things have small beginnings."
T.E. Lawrence

Single-stock performances may also offer a deep perspective on the long-term performance ofequal weight indices, based on the following intuition: single stocks can decline by up to 100%,
but their gains are unbounded. Moreover, the history of the stock market shows that just a rare
few of the tens of thousands of listed companies will go on to deliver outsized returns.13
Absent an uncommon degree of foresight as to which among the multitude of companies will
do so, a bias toward equal weighting at least ensures a proportional degree of participation,
which might be under-represented in market-cap-weighted indices.
Turning from intuition toward evidence, Exhibit 12 shows a more than 20-year frequency
distribution of the total returns of all the individual constituents of the S&P 500, measured foreach constituent during the period of its inclusion. The distribution is highly positively skewed,
exemplified by the fact that the average return was 615%, compared to a median return of
108%. This is not a unique occurrence; the average return exceeded the median return
among S&P 500 constituents in 29 of the 33 years between 1991 and 2023.14

13

One celebrated study identified that just 4% of companies generated all of the wealth in the U.S. stock market in excess of what might havebeen achieved with U.S. Treasury Bills. See Bessembinder, Hendrik; “Do Stocks Outperform Treasury Bills?” Journal of Financial
Economics Vol. 129, Issue 3, September 2018.

14

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2023.

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Exhibit 12: Consequences of Skewness – Distribution of S&P 500 Constituent Returns
20%
18%
16%

Median: 108%

Average: 615%

Frequency

14%
12%
10%
8%
6%
4%
2%
0%

Source: S&P Dow Jones Indices LLC, FactSet. Data from March 2003 to June 28, 2024. Index performance based on total return in USD.
Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Such positive skew matters to the relative returns of market-cap- versus equal-weighted
strategies because market-cap-weighted benchmarks tend to have above-average weights invery few stocks and below-average weights in the majority of stocks.15 If most stocks have
below-average returns, but an extremely rare few have extremely high returns then, all else
being equal, a market-cap-weighted benchmark would be likely to hold below-equal weights in
those rare few extreme performers. In other words, an equal weight approach may potentiallybenefit from such positive skewness by having higher weights in the select few stocks withabove-average returns, as compared to a market-cap-weighted approach.
To illustrate the real-world implications, Exhibit 13 shows the percentage of the constituents of
Exhibit 12 with total returns that were above the median—or greater than 2x, greater than 5x,
and so on—that were allocated a higher average weight by the equal weight index, and thosethat contributed more to the equal weight index’s total return, respectively, in comparison to the
S&P 500 and over the same period of Exhibit 12. We show both series because it is possible
for a stock to have a higher average weight in the equal-weighted S&P 500 and yet a higher
contribution to the market-cap-weighted S&P 500—for example, if the stock grew at amoderate pace until it was already among the largest stocks, and subsequently grew at amuch faster pace.

15

This is already demonstrated for the S&P 500 in Exhibit 8 but to be explicit, as of June 28, 2024, the S&P 500 had above-average weights
in 99 out of 500 constituent companies, and below-average weights in 401.

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Exhibit 13: Constituent Contributions and Average Weights% with Higher Average Weight in Equal Weight90%% with Higher Contribution to Equal Weight TR

56%

56%

60%

68%

56%

50%

61%

70%

75%

67%

60%

71%

78%

70%

76%

40%
30%
20%

0%

10%

0%

Proportion of Constituents80%0%> Median(N = 492)> 2x(N = 391)> 5x(N = 225)> 10x(N = 114)> 20x(N = 48)> 40x(N = 9)> 100x(N = 2)

Constituents Sorted by Total ReturnSource: S&P Dow Jones Indices LLC, FactSet. Data from March 2003 to June 28, 2024. Index performance based on total return indices in
USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

The results mostly confirm the intuition: the equal weight index maintained a higher average
weight and captured a greater share of performance in a majority of the constituents withabove-median returns and in the smaller fraction of stocks that had greater than either 2x, 5x,10x or 20x returns. Among the nine stocks with greater than 40x performance, it was evenly
split. But for the two stocks with greater than 10,000% total return, the equal weight index helda relative underweight, on average, in comparison to the S&P 500. These two constituents—
Apple and NVIDIA—had full period returns of close to 1,000x over the period, both rising fromtheir S&P 500 weights of 0.07% and 0.03%, respectively, in March 2003, to a weight of 6.6%
each in June 2024.
At the risk of stating the obvious, it would be difficult for those exact two stocks to outperform
by a similar relative degree over the next 20 years—they are already two of the largest
companies in the world and would likely overwhelm the entire U.S. economy if they were tooutperform by a similar amount again. A balanced perspective might be therefore advisable:
every analysis is sensitive to the particular time period studied, and the latter part of our data
series was coincident with an unusual degree of relative outperformance by the very largest
stocks. But, as we highlighted in the first section, these very same dynamics have made thecurrent market environment an unusually interesting one in which to evaluate equal weightapproaches.

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Active Funds and Equal Weight
Equal Weight’s exposure to the positive skewness of equity returns may offer insight into thechallenges of beating the index as a benchmark.16 However, it also raises another question. If
the key putative advantages of an equal weight approach are more exposure to single stock
performances, avoidance of the largest names and participation in the discipline ofrebalancing, all with the putative goal of long-term outperformance, then, are these also not allcases that might be made in favor of an actively managed fund instead?
Certainly, while it is not necessary for actively managed funds to do so, it is not uncommon tofind actively managed funds that are underweight the very largest stocks—at least incomparison to a market-cap--weighted benchmark. Moreover, the performance of an“averagely” skilled stock picker over a particular period is usefully benchmarked by the“average” return among the stocks they are picking from—in other words, an equal weightindex return.17 For these two reasons, and because actively managed strategies often
rebalance regularly like equal weight indices, the latter can sometimes be a useful benchmark
for judging the performance of active and “stock-picking” strategies.18
As a result, we might expect the relative returns of Equal Weight to echo that of actively
managed mutual funds. As it happens, in aggregate, they do—at least in the short term. But
the long-term statistics are different.19 Indeed, given Equal Weight’s long-term outperformanceand parallels to active performance, the fact that over 90% of large-cap active funds
underperformed the S&P 500 over the past 20 years20 may be surprising. But when wecompare active funds to the S&P 500 Equal Weight Index as a benchmark, the results showthat few active funds were able to outperform the equal weight index in most years (see Exhibit
14).

16

See Ganti, Anu R., and Craig J. Lazzara, “Shooting the Messenger,” S&P Dow Jones Indices LLC, Nov. 22, 2022.

17

Here, we are ignoring any impact from rebalances—or equivalently, we can assume they will be replicated by the “stock picker.”

18

This concept was outlined in more detail here: Edwards, Tim, and Craig J. Lazzara, “Equal-Weight Benchmarking: Raising the Monkey
Bars,” S&P Dow Jones Indices LLC, May 2014. See also Chan, Fei Mei, and Craig J. Lazzara, “Degrees of Difficulty: Indications of Active
Success,” S&P Dow Jones Indices LLC, Jan. 24, 2022.

19

See Edwards, Tim, Grace Stoddart and Davide Di Gioia, “More Equal than Others: 20 Years of the S&P 500 Equal Weight Index,” S&P Dow
Jones Indices LLC, June 14, 2023. The results were extended to cover 2023 performances in Ganti, Anu, “Diversification, Equity &Indices,” S&P Dow Jones Indices LLC, May 20, 2024.

20

See Ganti, Anu, Davide Di Gioia, Tim Edwards, Sabatino Longo and Joseph Nelesen, “SPIVA U.S. Year-End 2023,” S&P Dow Jones
Indices LLC, March 6, 2024.

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Exhibit 14: Percentage of All Actively Managed Domestic U.S. Equity Funds
Underperforming the S&P 500 Equal Weight Index Annually
25%

95%

90%

85%

% of Active Funds Underperforming

20%

81%

81%
74%

73%

75%

69%

71%

70%

69%

15%

64%
60%
48%

50%

10%
65%

53% 53%

53%

47%

5%

33%

32%

25%

0%
-5%
-10%

All Domestic Equity Funds

Average

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

-15%

2004

0%

S&P 500 Equal Weight Index Annual Performance
Relative to S&P 500

100%

S&P 500 Equal Weight Index Annual Performance Relative to S&P 500

Source: S&P Dow Jones Indices LLC, CRSP. Data as of Dec. 31, 2023. Past performance is no guarantee of future results. Chart isprovided for illustrative purposes.

As Exhibit 14 illustrates, more than 50% of actively managed domestic U.S. equity funds
underperformed the equal weight index in 16 of the past 20 calendar years. The long-term
statistics are more emphatic. In a recent study conducted to accompany the 20th anniversaryof the launch of the S&P 500 Equal Weight Index, this figure rose to nearly all (99%) of actively
managed funds underperforming over a 20-year period.21

21“More Equal than Others: 20 Years of the S&P 500 Equal Weight Index,” op. cit.

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Conclusions
The S&P 500 Equal Weight Index has recently displayed underperformance in comparison to
the S&P 500, driven primarily by historical extremes of performance in the market’s largest
names. Moreover, concentration in the broader U.S. equity market has increased to its highest
in many years, while single-stock momentum trends are showing unusual signs of extension.
Historically, such periods have tended to eventually revert toward their historical means, withsuch reversion accompanied by stronger relative performance by equal weight indices.
While we cannot predict when an inflection point for the equal weight index’s relative
performance will occur, major turning points have historically coincided after extremes inmega-cap performance and in the performance of momentum stocks.22 The possibility thatsuch a turn in the markets may occur, and be an important driver of overall risk, suggests thatan evaluation of an equal weight approach to large-cap U.S. equities may prove timely.
Furthermore, the long-term record and sources of return in the S&P 500 Equal Weight Index
suggest that such an investigation might be productive for more than just short-term or tacticalreasons.
These are not just theoretical considerations; there may be practical applications, too. As well
as monitoring and potentially replicating the S&P 500 Equal Weight Index directly, there arenow exchange-traded funds (ETFs) and index funds licensed to track this index across a rangeof markets—including the U.S., Europe, Australia, the U.K., Canada and Israel. More recently,
listed futures tied to the S&P 500 Equal Weight Index also began trading at the Chicago
Mercantile Exchange (CME).23 These licensed products may provide a practical context formarket participants who wish to engage with an equal weight index in ways that extend beyond
the theoretical perspectives presented here.

22

See Ganti, Anu R., “An Elevating Effect on Equal Weight?” S&P Dow Jones Indices LLC, Nov. 20, 2023; also see Exhibits 2b and 3.

23

A full list of licensed products is regularly updated on the S&P DJI website.

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Performance Disclosure/Back-Tested Data
The S&P 500 Equal Weight Index was launched on January 8, 2003. The S&P 500 Momentum Index was launched on November 18, 2014.
The S&P MidCap 400 was launched on June 19, 1991. All information presented prior to an index’s Launch Date is hypothetical (backtested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date.
However, when creating back-tested history for periods of market anomalies or other periods that do not reflect the general current market
environment, index methodology rules may be relaxed to capture a large enough universe of securities to simulate the target market the index
is designed to measure or strategy the index is designed to capture. For example, market capitalization and liquidity thresholds may be
reduced. Complete index methodology details are available at www.spglobal.com/spdji. Past performance of the Index is not an indication of
future results. Back-tested performance reflects application of an index methodology and selection of index constituents with the benefit ofhindsight and knowledge of factors that may have positively affected its performance, cannot account for all financial risk that may affectresults and may be considered to reflect survivor/look ahead bias. Actual returns may differ significantly from, and be lower than, back-tested
returns. Past performance is not an indication or guarantee of future results. Please refer to the methodology for the Index for more details
about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as
all index calculations. Back-tested performance is for use with institutions only; not for use with retail investors.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which
there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the index is set to a fixed value forcalculation purposes. The Launch Date designates the date when the values of an index are first considered live: index values provided forany date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as thedate by which the values of an index are known to have been released to the public, for example via the company’s public website or its data
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Typically, when S&P DJI creates back-tested index data, S&P DJI uses actual historical constituent-level data (e.g., historical price, market
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“Backward Data Assumption” is a process that applies the earliest actual live data point available for an index constituent company to all priorhistorical instances in the index performance. For example, Backward Data Assumption inherently assumes that companies currently not
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Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices maintains the index
and calculates the index levels and performance shown or discussed but does not manage actual assets. Index returns do not reflect paymentof any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track
the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the
securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment
for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the investment plus
accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three-year period, an annual 1.5% fee
taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and acumulative net return of 27.2% (or US $27,200).

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