Survival of the Fittest – S&P 500 Roars Past S&P 500 Equal-Weighted Index
The S&P 500 Index is one of the most well-known benchmarks in the world of investing. It tracks the performance of 500 of the largest publicly traded companies in the United States, weighted by market capitalization. In contrast, the S&P 500 Equal-Weighted Index includes the same 500 companies but assigns each company an equal weighting, regardless of its size. Although they share the same constituents, the weighting methodologies create distinct investment profiles and performance outcomes. This segment explores the pros and cons of each index, their performance in 2024, how their top holdings differ, and how they compare to their composition in 1999.
Methodology and Structure
The S&P 500 Index is weighted by market capitalization, meaning larger companies such as Apple, Microsoft, and Amazon disproportionately impact the index’s performance. This structure allows the index to reflect the performance of the U.S. economy’s largest and most influential companies. However, it also makes the index more susceptible to the fortunes of a few dominant players, especially now during periods of heightened market concentration.
By contrast, the S&P 500 Equal-Weighted Index assigns an equal 0.2% weight to each of the 500 companies, regardless of their market capitalization. This approach diversifies the impact of individual stocks, giving all companies a chance to contribute meaningfully to the index’s performance. Consequently, the equal-weighted index tends to be more aligned with mid-cap companies and sectors beyond the tech-heavy tilt of the market-cap-weighted index.
Performance in 2024
In 2024, the performance of the two indices diverged significantly, driven by the dominance of the “Magnificent Seven” mega-cap technology stocks in the market-cap-weighted index. These companies—including Apple, Microsoft, Nvidia, Amazon, Alphabet, Tesla, and Meta Platforms—continued to benefit from themes like artificial intelligence, cloud computing, and digital advertising. As a result, the market-cap-weighted S&P 500 delivered a robust return of approximately 25% for the year.
On the other hand, the S&P 500 Equal-Weighted Index lagged with a return closer to 13%. This underperformance stemmed from the relative weakness of smaller-cap stocks and sectors such as healthcare and industrials, which struggled amid rising interest rates and economic uncertainty. The equal-weighted index’s lack of concentration in mega-cap tech stocks also meant it missed out on the outsized gains of the largest players.
Differences in Top Holdings
The top 10 holdings of the S&P 500 Index are dominated by the largest companies in the U.S. economy. As of the end of 2024, the top 10 holdings accounted for more than 30% of the index’s total weight—including:
- Apple (7.0%)
- NVIDIA (6.6%)
- Microsoft (6.2%)
- Amazon (3.8%)
- Alphabet Class A (2.0%) and Class C (1.6%)
- Meta (2.5%)
- Tesla (1.9%)
- Berkshire Hathaway (1.7%),
- Broadcom (1.5%)
This concentration reflects the dominance of mega-cap stocks and their influence on the broader market. When one of these stocks experiences a sharp rise or decline, the overall index is significantly affected. For example, a 10% drop in Apple’s stock price could reduce the index’s return by approximately 0.72 percentage points, underscoring the outsized impact of its largest constituents. In 2024, the S&P 500 Top 10 returned over 40%.
In contrast, the S&P 500 Equal-Weighted Index assigns the same weight to each of its 500 constituents, resulting in a more diversified portfolio. The top 10 holdings in the equal-weighted index typically represent only about 2% of the total index weight combined, as each stock carries an equal 0.2% weight. This structure reduces the impact of any single company’s performance. For example, a 10% drop in any one stock would reduce the equal-weighted index’s return by just 0.02 percentage points, making it less sensitive to the performance of individual companies. However, the equal-weighted approach also means that large gains in mega-cap stocks have less influence on the overall index performance, potentially limiting returns during periods of strong performance by market leaders.
Pros and Cons of Each Index
S&P 500 Index (Market-Cap Weighted)
- Pros:
- Reflects the performance of the largest, fastest-growing, and most influential companies in the U.S.
- Tends to perform well during periods of strong performance by mega-cap stocks.
- Highly liquid and widely used as a benchmark for passive investment strategies.
- Cons:
- Heavily concentrated in a few companies and sectors, particularly technology.
- May underperform during periods of market rotation into smaller-cap or value-oriented stocks.
S&P 500 Equal-Weighted Index
- Pros:
- Provides broader diversification across all 500 constituents.
- Reduces the impact of market concentration and overexposure to mega-cap stocks.
- May outperform during periods of strong performance by smaller-cap or underrepresented sectors.
- Cons:
- Higher turnover and trading costs due to frequent rebalancing.
- Will lag during periods of mega-cap dominance, as seen in 2024.
Investment Implications
The choice between the S&P 500 Index and the S&P 500 Equal-Weighted Index depends on an investor’s objectives and market outlook. The market-cap-weighted index is suitable for those seeking exposure to the largest and most liquid companies, while the equal-weighted index may appeal to investors looking for diversification and reduced concentration risk.
In 2024, the divergence in performance highlighted the importance of considering market conditions when comparing the two indices. During years dominated by mega-cap growth, the market-cap-weighted index outperforms. Conversely, the equal-weighted index may shine during periods of broader market participation and strength in smaller-cap or value stocks.