Equal-weighted index
Also known as: equal weight index
An equal-weighted index gives every company in it the same weighting, regardless of size. In a 500- equal-weighted index, each holding starts out worth roughly 0.2% of the total, whether it is one of the largest companies in the country or one of the smallest included.
This is different from the far more common weighted approach, where a company's actual size determines how much it moves the index. An equal-weighted version of the gives a small company inside the index the same influence as a giant one, so it behaves more like an average of all 500 businesses rather than a reflection of the market's largest names.
Because prices drift apart over time as some rise faster than others, an equal-weighted index has to be rebalanced periodically, selling down positions that have grown and buying more of positions that have lagged, to bring every holding back to the same starting weight. That rebalancing creates more trading activity than a cap-weighted fund needs.
An equal-weighted index tends to behave differently than its cap-weighted counterpart depending on market conditions. When a handful of are driving most of the market's gains, the equal-weighted version lags behind, since it deliberately limits how much those giants can contribute. When gains are broader across smaller and mid-sized companies, it can outperform instead.