Paul Lacroix, Head of Products for Ossiam, a leader in quantitive investment strategies, considers the case for equal weight strategies against the dominant performance of the few US mega cap tech stocks – the benefits of diversification, but also the risk and consequences of of structural biases.
“As concentration risk in US equities reaches unprecedented levels—largely driven by the dominant performance of a few mega-cap technology stocks—investors are increasingly considering alternative weighting methodologies. Among these, the equal weight approach, which assigns identical weights to all constituents regardless of their market capitalization, offers a compelling case for enhanced diversification.
“Compared to the traditional market-cap-weighted S&P 500, the S&P 500 Equal Weight Index demonstrates markedly lower concentration, as reflected by metrics such as the Herfindahl-Hirschman Index. This approach inherently provides a more balanced exposure across sectors and companies, potentially mitigating the disproportionate influence of overvalued large-cap stocks on portfolio returns.
“However, while equal weighting enhances diversification, it introduces structural biases. By design, the methodology tilts portfolios toward smaller-cap stocks and sectors that are underrepresented in cap-weighted indices. Over the past decade, this has resulted in persistent underweights in technology and communication services, alongside overweights in more cyclical sectors such as industrials, financials, and consumer discretionary.
“As illustrated in the following chart, these sector tilts have underperformed over the last decade; sectors with overweight positions (materials, utilities, financials, industrials) lagged behind the underweighted sectors, notably technology and communication services, which delivered stronger returns.
“While the equal weight strategy offers greater diversification benefits, it implicitly adopts a contrarian position relative to prevailing market leaders. This characteristic can serve to reduce concentration risk but may also limit upside potential in momentum-driven market environments.”
