Investors choosing between equal-weighted and market cap-weighted index funds face a trade-off between diversification and performance, according to analysis from Morningstar and HANetf.
Market cap-weighted funds allocate proportionately, so larger companies dominate. In the S&P 500, the Magnificent 7 account for around a third of the index's value, with a combined market cap of about $22 trillion. Equal-weighted funds give each component the same size, reducing concentration in tech and increasing exposure to sectors such as healthcare, industrials, energy and financials.
Morningstar compared its Global Target Market Exposure Equal Weighted index fund with a market cap-weighted peer over 10 years to 1 August 2026. An initial $10,000 in the equal-weighted fund grew to $23,041 (cumulative return 130.68%), while the market cap-weighted version turned $10,000 into $33,360 (cumulative return 224.68%).
Mark Preskett, senior portfolio manager at Morningstar Wealth, said equal-weighted indices tilt away from megacap growth towards cheaper, less profitable parts of the market. He noted they can be used tactically to dial down risk, but his team would not recommend them as a long-term strategy for mainstream clients.
HANetf's Cameron MacDonald said scepticism around AI spending, a rotation into smaller companies and mixed recent results for the Magnificent 7 support the case for equal weighting. Invesco cited FactSet data showing the equal-weight S&P 500 outperformed its market cap-weighted peer by an average of 1.05% annually between 1999 and 2023.