Learn how an equal-weight index works, how it differs from market-cap weighting, and why it matters in investment analysis.
Stock market indices are essential tools for tracking performance and guiding investment decisions. Among them, the equal-weight index stands out because it gives every stock the same level of importance, regardless of its market capitalisation. Unlike market-cap-weighted indices, where large companies dominate index movements, equal-weight indices distribute influence evenly across all constituents.
In this guide, we’ll explore the definition, working, benefits, challenges, and real-world examples of equal-weight indices, along with their growing role in index-based investing.
In practice, this means that whether a company is large or small, it contributes equally to the index’s overall performance. For example, if an index has 50 companies, each stock will hold a 2% weight. This structure ensures diversification and reduces concentration risk, as no single stock dominates index movements.
This foundation makes equal-weight indices especially useful when comparing them with more traditional market-cap-weighted indices, a contrast we’ll explore in the next section.
Stock indices differ mainly in how they assign weight to companies. The two most common approaches are equal-weighting and market-cap weighting.
Equal-Weight Index – Every stock carries the same weight, regardless of its size or market value.
Market-Cap Weighted Index – Each stock’s weight is proportional to its market capitalisation, giving larger companies greater influence.
For instance, in the Nifty 50 (market-cap weighted), companies like Reliance Industries or HDFC Bank hold significant sway. In the Nifty 50 Equal Weight Index, however, these companies carry the same weight as smaller constituents.
This distinction highlights why equal-weight indices are seen as an alternative for achieving broader exposure and reducing concentration in a few large-cap stocks.
In investing, two widely followed approaches are value and momentum strategies, each offering a different path to potential returns.
Value investing focuses on buying undervalued stocks with strong fundamentals, expecting their prices to rise as the market recognises their true worth. It emphasises long-term growth and tends to carry lower risk.
Momentum investing involves investing in stocks that have recently shown strong performance, with the expectation that the upward trend will continue. It aims for shorter-term gains but comes with higher risk.
Both strategies can complement an equal-weight approach by offering different perspectives on stock selection and diversification.
Equal-weight indices follow a structured approach to ensure every company carries the same importance. This involves two key steps: construction and rebalancing.
The weight of each stock is calculated by dividing 1 by the total number of stocks in the index.
Formula:
Weight of each stock = 1 / Total number of stocks in the index
Example:
If an index has 20 companies, each stock will carry a 5% weight, regardless of its market capitalisation.
As share prices change, equal weighting can become distorted. To restore balance, indices are rebalanced periodically, often on a quarterly basis. During rebalancing, the index provider adjusts holdings by buying or selling stocks so that each company regains its equal share.
Rebalancing ensures that no single stock gains excessive influence, maintaining balanced representation and reducing concentration risk.
Equal-weight indices provide a distinct alternative to traditional market-cap-weighted indices by offering broader and more balanced exposure.
Broader diversification – Every stock carries the same representation, reducing reliance on any single company.
Avoids concentration risk – Prevents large-cap stocks from dominating index performance.
Exposure to mid and small-cap stocks – Allocates relatively more weight to smaller companies compared to market-cap indices.
Potential for higher returns – May outperform during periods when mid-sized or undervalued stocks perform strongly.
These advantages make equal-weight indices a commonly used approach for maintaining balanced and resilient portfolio exposure.
While equal-weight indices offer several benefits, they also come with limitations that investors should consider.
Frequent rebalancing – Leads to higher transaction costs and reduces overall efficiency.
Higher volatility – Greater exposure to mid and small-cap stocks makes index performance more unstable.
Liquidity concerns – Requires holding larger portions of less liquid stocks, which may be harder to trade.
Tax impact – Frequent adjustments in funds or ETFs can trigger higher tax liabilities.
These disadvantages highlight why equal-weight indices may not suit all investors, especially those seeking low-cost, passive exposure.
Equal-weight indices are applied in different markets to provide diversified exposure and reduce concentration in a few large companies. Here are some widely followed examples:
An equal-weight version of the Nifty 50.
Each of the 50 stocks carries a 2% weight.
Rebalanced quarterly to maintain equal allocation.
Offers exposure across large Indian companies with equal weighting, ensuring no single company has disproportionate influence.
Represents 100 largest listed Indian companies.
Each stock contributes equally to index performance.
Provides representation of a broader set of sectors compared to the Nifty 50 Equal Weight Index.
A global example based on the same constituents as the S&P 500.
Every stock is given the same weight, unlike the market-cap weighted version.
Represents large and mid-sized companies with equal weighting.
Together, these indices show how equal-weighting is applied both in India and globally to achieve fairer representation and diversified market exposure.
To gain access to equal-weight strategies, investors often look to mutual funds or exchange-traded funds (ETFs) that track these indices.
Equal-weight index funds follow the same methodology and periodically rebalance to maintain equal exposure. While currently more common in the US market, Indian asset managers are introducing equal-weight fund options, especially for Nifty-based indices.
Some characteristics of such funds include:
Rebalancing Schedules: Usually quarterly or semi-annually.
Expense Ratios: Can be slightly higher due to operational complexity.
Volatility: May be higher compared to traditional index funds.
Equal-weight indices provide a fresh way to look at index investing. By giving equal importance to all constituents, they challenge the dominance of large-cap stocks that often sway traditional indices. They offer educational value in understanding diversification, risk management, and portfolio construction. While not as commonly adopted as market-cap-weighted indices in India yet, equal-weight indices are gaining recognition as useful tools for evaluating market breadth and performance.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
While equal-weight indices treat each stock equally, market-cap-weighted indices allocate weight based on the size of the company.
They offer broader diversification and reduce concentration risk compared to traditional indices.
Yes, some AMCs have introduced funds tracking the Nifty 50 Equal Weight and Nifty 100 Equal Weight indices.
They involve more frequent rebalancing, which can lead to higher costs and tax implications.
Equal-weight funds offer diversification and reduce reliance on large-cap stocks. However, they involve frequent rebalancing, higher costs, and greater volatility compared to traditional market-cap-weighted funds, which may impact fund performance and costs.
To calculate an equal-weight index, assign each stock a weight of 1 ÷ total number of stocks in the index. For example, in a 20-stock index, each stock would carry a 5% weight.
Equal-weighted ETFs are designed to provide balanced exposure across all constituents, ensuring mid and small-cap stocks contribute equally alongside large-cap companies in index performance.
The equally weighted index return is the average return of all constituent stocks, since each carries the same weight. This differs from market-cap indices, where large companies have greater impact on returns.
Equal-weight ETFs track indices where each constituent stock has the same weight. Fund managers rebalance periodically to maintain equal allocation, buying or selling shares to restore balance.