Equal versus Market Cap-Weighted Stock Market Indices

And the winner is?

Nicolas Rabener
10 min read
20 Jan 2025

SUMMARY

  • Equal-weighted stocks outperformed market cap-weighted stocks in 8/10 decades
  • They were also more volatile, but generated a higher Sharpe ratio
  • May appeal to investors concerned about the concentration level of the S&P 500

INTRODUCTION

Weighting stocks by market capitalization is often the most practical approach for large investors, as it minimizes transaction costs. However, it is not the only method available. Investors can also choose to weight stocks based on fundamentals like revenues or profits, use factor-based approaches, or apply equal weighting.

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