Meta’s recent troubles saw it lose $251 billion (€220 billion) in a day – the biggest-ever one-day loss of market value. Fortunately for investors, the biggest one-day gain in history soon followed, with Amazon’s strong earnings boosting its market value by $191 billion.
Still, as various analysts have warned, such wild swings will unnerve index investors who fear the US market is too dependent on a few large-cap technology stocks. At the end of 2021, the five biggest companies in the US were all tech stocks, accounting for almost a quarter of the index – the largest concentration in over 50 years.
While concentration risk is a worry, many investors seeking global diversification may be wary of ignoring the US market.
One solution: forget the market-cap weighted S&P 500 and buy an equal-weighted version of the index. Equal-weighted indices weigh all component stocks equally; thus, no one stock has an outsized impact.
An equal-weighted S&P 500 would have underperformed over the last decade as big tech stocks kept soaring. However, market historian Mark Hulbert notes that since 1971, an equal-weighted S&P 500 has outperformed by 1.5 percentage points annually.
Similarly, a 2018 S&P Dow Jones Indices report says equal-weight indices demonstrated long-term outperformance in many global markets.
There are downsides, including greater volatility, less liquidity, and higher trading costs.
However, concentration risk is an issue in many markets, not just the US. If you’re looking for more diversification, equal-weight indices may help you sleep better at night.
