The rise of the “mega-caps” in recent years has caused a significant divergence in the performance of the S&P 500 — which is market cap weighted — and the S&P 500 Equal Weight index. As the mega-caps like Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), and NVIDIA (NVDA) have pushed ever higher into multi-trillion dollar companies, their weight in the S&P 500 has ballooned to more than 25% of the index.In the S&P 500 Equal Weight index, however, where each of the 500 stocks has a 0.2% weighting after quarterly re-balancing, the six mega-caps make up just 1.2% of the index.Given these differences, it’s easy to see how the performance between a cap-weighted and equal-weighted index can diverge.

As shown below, the cap-weighted S&P 500 has posted a total return of just over 110% over the last five years compared to a gain of roughly 84% for the S&P 500 Equal Weight index.As you can see in the chart, the gap between the two didn’t really start widening until early on during this bull market in early 2023.
Anecdotally, the cap-weighted version of the S&P 500 seems to be getting all the love these days, with some calling it the perfect momentum index.Combining that recent sentiment with the very clear differences between the two indices, readers may be surprised that the longer-term performance between the two has been similar and even tilts towards the equal-weight version.As shown below, over the last 20 years, the cap-weighted index has just recently overtaken the equal-weighted index on a total return basis, but outperformance has gone back and forth many times over this time frame.
And since 1990, the equal-weighted version of the S&P has actually been the clear winner over the cap-weighted version.As you can see in the chart below, the Dot Com Bubble of the late 1990s pushed the cap-weighted S&P solidly above the equal-weighted version in the final years of that bubble, but the bursting of the bubble and the 2003-2007 bull market resulted in a performance shift that allowed the equal-weight index to pull ahead.While the mega-caps of today have had a leg up on the rest of the market for the past few years, an extended period of underperformance from them would allow the equal-weighted version to become en-vogue again.
Below is a look at the differences in sector weightings for the S&P 500 (cap-weighted) and S&P 500 Equal Weight indices.By default, the sectors with the largest number of stocks in the index will have the highest weightings in the equal-weight index.While the Tech sector makes up nearly a third of the cap-weighted index, it’s only 13.7% of the equal-weight index.Industrials and Financials each have a larger weight than Tech in the equal-weight index, while they combine for a weighting that’s just 2/3 of Tech’s weighting in the cap-weighted index.When looking at the pie charts below, it’s the equal-weight version that appears more balanced and diversified at the moment.No sector has a weighting below 4.4% in the equal-weight index, while the cap-weighted index has four sectors with weightings below 3.3%.Movements in Materials, Real Estate, Utilities, and Energy have virtually no impact on the cap-weighted index as a whole these days. More By This Author:Philip Morris International Pops; Yield DropsWeren’t Rates Supposed To Fall? TSM Rights The Ship