The Case for Equal Weightings

Michael E. Schroer, CFA


Mega-cap stocks have been among the best-performing segments of the U.S. stock market in recent years, as evidenced by the significant outperformance of cap-weighted indices compared to their equal-weighted versions. However, recent market action and a longer-term perspective both suggest that this trend may be reversing, presenting opportunities for investors to rebalance portfolios accordingly.

The chart below illustrates the performance of the S&P 500 on both a cap-weighted and equal-weighted basis since 2011. The five-year period from 2011 through 2016 saw similar returns from both versions of the index, but since the beginning of 2017, the cap-weighted index has strongly outperformed. Because the constituents of each index are identical, the difference in return is due entirely to the weighting of stocks within each index. Apple, for example, was approximately 5% of the cap-weighted index as of 3/31/2020, compared to 0.2% of the equal-weighted index. Outperformance of the largest stocks in the index thus leads to outperformance of the cap-weighted index as a whole.



Data from 12/31/2011–3/31/2020
1Percentage may not match the actual difference due to rounding of percentages to the nearest decimal place.
Sources: FactSet, S&P Dow Jones

Longer-term history suggests the opposite. Since Standard & Poor’s began the construction of the equal-weighted index in 1989, the equal-weighted index has outperformed the cap-weighted version by 0.9% per year. Over time, the ability of the largest companies in the index to maintain above-average growth tends to be hampered by regulatory issues, competitive pressures, or simply the inability to grow at the same rate from a larger base of assets and size.



Data from 12/31/1989–3/31/2020
1Percentage may not match the actual difference due to rounding of percentages to the nearest decimal place.
Sources: FactSet, S&P Dow Jones

There have been similar periods when the cap-weighted index has strongly outperformed—most notably in the later 1990s. The chart below illustrates the return of the two indices during the three and one-quarter year period ending 3/31/2000 (similar to the three and one-quarter year period ending 3/31/2020). For the three and one-quarter year period ending March 31, 2000, the cap-weighted index outperformed the equal-weighted version by 10.2% per year, as mega-cap tech stocks led the market. However, in the following years through 2005, the cap-weighted index significantly underperformed, as investors shifted their attention to medium-sized and smaller-sized companies in the index that had underperformed previously.



Data from 12/31/1996–12/31/2005
1Percentage may not match the actual difference due to rounding of percentages to the nearest decimal place.
Sources: FactSet, S&P Dow Jones

We may be at a similar inflection point today. Over the first two months of the current quarter, the equal-weighted index posted a 19.8% gain, compared to 18.2% for the cap-weighted index. While this is obviously a short time frame, it is indicative of the potential for investors to outperform if willing to diversify away from investing in mega-cap companies.


This Market Update reflects the thoughts of Renaissance as of May 31, 2020. This information has been provided by Renaissance Investment Management. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision, nor should it be considered a recommendation. The views and opinions expressed are those of the Chief Investment Officer at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.


If Renaissance or benchmark performance is shown, it represents historically achieved results, and is no guarantee of future performance. Future investments may be made under materially different economic conditions, in different securities, and using different investment strategies, and these differences may have a significant effect on the results portrayed. Each of these material market or economic conditions may or may not be repeated. Therefore, there may be sharp differences between the benchmark or Renaissance performance shown and the actual performance results achieved by any particular client. Benchmark results are shown for comparison purposes only. The benchmark presented represents unmanaged portfolios whose characteristics differ from the composite portfolios; however, they tend to represent the investment environment existing during the time periods shown. The benchmark cannot be invested in directly. The returns of the benchmark do not include any transaction costs, management fees, or other costs. The holdings of the client portfolios in our composites may differ significantly from the securities that comprise the benchmark shown. The benchmark has been selected to represent what Renaissance believes is an appropriate benchmark with which to compare the composite performance.

The value of an investment may fall as well as rise. Please note that different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Investor principal is not guaranteed, and investors may not receive the full amount of their investment at the time of sale if asset values have fallen. No assurance can be given that an investor will not lose invested capital. Consultants supplied with these performance results are advised to use this data in accordance with SEC guidelines. The actual performance achieved by a client portfolio may be affected by a variety of factors, including the initial balance of the account; the timing and amount of any additions to or withdrawals from the portfolio; changes made to the account to reflect the specific investment needs or preferences of the client; durations and timing of participation as a RIM client; and a client portfolio’s risk tolerance, investment objectives, and investment time horizon. All investments carry a certain degree of risk, including the loss of principal, and are not guaranteed by the U.S. government.

S&P Data

S&P Dow Jones is the source and owner of the trademarks, service marks, and copyrights related to the S&P Indexes. S&P® is a trademark of S&P Dow Jones. This presentation may contain proprietary S&P data and unauthorized use, disclosure, copying, dissemination, or redistribution is strictly prohibited. This is a presentation of Renaissance Investment Management. S&P Dow Jones is not responsible for the formatting or configuration of this material or for any inaccuracy in Renaissance’s presentation thereof. This data is to be used for the recipient’s internal use only.

Referenced Index

(Indices are unmanaged and are not available for direct investment.)

S&P 500 Index

The S&P 500 Stock Index is a market-capitalization weighted index and consists of 500 stocks chosen for market size, liquidity, and industry group representation.


Michael E. Schroer, CFA


PUBLISHED: June 16th, 2020
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