For decades, passive investors followed a simple logic: track the index, accept market cap weights, and let the trend do the work. However, using the U.S. as a case study, that logic has come under pressure since 2023, driven by the extraordinary dominance of the “Magnificent Seven”: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla.

 

Together, these names have skewed index performance and portfolio exposure, prompting allocators globally - including in Asia - to question whether traditional benchmarks still offer the diversification they promise.

 

Outsized impact on returns

 

In 2023, these seven stocks collectively accounted for over 70% of S&P 500 returns, with the broader index returning 24%. This influence has continued into 2025, with the “Magnificent Seven” accounting for over 40% of the S&P 500’s returns since April 2025. Their combined market cap now exceeds $16 trillion, representing over 30% of the index's total weight.

 

This concentration has prompted many institutional investors to explore equal-weighted tracker funds. These instruments assign each constituent the same weight, regardless of market capitalisation. The goal is simple: to mitigate concentration risk and achieve more balanced exposure.

 

Why equal weight, and why now?

 

Equal-weighted indices rebalance regularly, selling outperformers and buying underperformers. This contrarian approach can lead to outperformance during periods when smaller or undervalued stocks rally.

 

In 2023, the S&P 500 Equal Weight Index lagged the cap-weighted version due to the tech giants' outsized gains. However, in early 2025, as some of these mega-caps faced headwinds, the equal-weighted index demonstrated resilience, highlighting its potential as a diversification tool.

 

The appeal: Broader exposure, contrarian discipline

 

Equal-weighted funds offer:

 

· Diversification: Reduced reliance on a handful of stocks.

· Contrarian Rebalancing: Systematic buying of laggards and selling of leaders.

· Exposure to Mid and Small Caps: Greater participation in broader market movements.

 

For investors concerned about overexposure to tech behemoths, equal-weighted strategies provide a means to capture market gains without being overly dependent on a few names.

 

But not without trade-offs

 

Equal-weighted strategies come with challenges:

 

· Higher Turnover: Frequent rebalancing can lead to increased transaction costs.

· Sector Bias: Equal weighting doesn't account for sector performance, potentially leading to overexposure in underperforming sectors.

· Underperformance in Narrow Markets: When a few large-cap stocks drive market gains, equal-weighted indices may lag.

 

Does this undermine cap-weighted indices?
 

Not entirely, but it challenges their dominance and gives investors additional food for thought.

 

Cap-weighted indices remain essential tools because they reflect market consensus, offer deep liquidity, and form the backbone of portfolio construction and benchmarking. However, the growing popularity of equal-weighted trackers signals rising discomfort with concentrated risk and the over-reliance on a few mega-cap names.

 

Rather than abandoning cap-weighting, many investors are now complementing it with equal-weighted strategies. This allows them to diversify exposures, reduce reliance on narrow market leadership, and smooth portfolio volatility. In this sense, equal-weighted funds represent not a rejection of traditional indexing but a more intentional, risk-aware evolution.

 

Conclusion: Not just passive, but intentional

 

The emergence of equal-weighted tracker funds signifies a shift towards more intentional passive investing. In an environment where a few stocks can disproportionately influence index performance, equal-weighted strategies offer a path to broader market participation and risk mitigation.

 

In summary, equal-weighted funds provide a compelling option for investors seeking diversification beyond the dominant mega-caps. They blend the simplicity of a passive investment strategy with the benefits of a more balanced approach.

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