Many investors would likely not be shocked to learn that market-cap-weighted strategies saw strong results in 2024. Given the relative dominance of mega cap tech stocks, this does not come as a particular surprise. A recent report from S&P Dow Jones Indices broke down where the biggest discrepancies between equal weight and cap-weighted strategies come from.
According to the report, the S&P 500 Equal Weight Index unfortunately underperformed the S&P 500 by 12% last year. These results follow a similarly poor performance for the S&P 500 Equal Weight Index in 2023.
Only four of the 11 equal weight sectors outperformed that of the cap-weighted strategy. Those sectors in particular were utilities, industrials, real estate, and energy.
Meanwhile, cap-weighted strategies dominated the other seven sectors under comparison. Sectors where cap-weighted strategies particularly outperformed included communication services, technology, consumer discretionary, and consumer staples.
Why Equal Weight May Still Make Sense
Keeping these results in mind, investors may believe it wise to stray from equally weighted equity strategies this year. However, there are still plenty of reason to consider adding more equal weight ETFs to one’s portfolio.
For starters, some market experts are anticipating the equity market rally will broaden out in 2025. Should equity returns broaden far past the Magnificent Seven, investors with a more equally weighted strategy could see stronger results.
Equal weight strategies can also provide defensive benefits, as well. Concerns remain on the rise regarding whether or not the mega cap tech stocks are due for a correction this year. Should these tech companies see some pullback, equally weighted ETFs are likely to be less at risk than a market-cap-weighted strategy.
For those looking to add an equally weighted ETF to their portfolio, the Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW ) could be a good call. This fund provides low-cost access to about 500 of the largest equities in the U.S.
As the fund’s title implies, GSEW’s portfolio is designed to offer even access to each of these top U.S. companies. This allows the fund to better participate in broad market and sector rallies. Since the fund is equally weighted, GSEW is less at risk of downturn from the underperformance of individual companies than a cap-weighted strategy would be.
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