Reduced stock-specific risk, broader sector exposure and higher dividend yields are some of the main advantages of equal-weight U.S. equity ETFs. Another plus this year, unusually, is better performance.
More often than not, however, severely underweighting the biggest and most successful companies in the stock market, as equally weighted ETFs do, has been an underperforming strategy.
When applied to the U.S. market, an equal-weight strategy radically changes the makeup of an ETF’s portfolio. Index giants like Nvidia Corp., Apple Inc. and Microsoft Corp. get their weightings slashed, from more than 5% each in the S&P 500, to about 0.3% when equal weights are applied.
“You don’t have the same degree of risk when it comes to the security weightings and the like, but, the downside to that is clearly that you don’t capture as much of the upside,” said Bipan Rai, head of ETF and alternatives strategy with BMO Global Asset Management.
“Equal weight tends to lag when a small group of giant companies leads the market,” said Maddy Griffith, an institutional portfolio manager with Toronto-based CI Global Asset Management. “Cap-weighted ETFs tend to benefit more in this environment, as they already have greater exposure to the stocks driving performance.”
For example, consider CI Invesco S&P 500 Equal Weight Index ETF, which was launched in 2018 and became part of the CI fund family earlier this year. It has trailed the broad U.S. market in five of its seven calendar years, including the three most recent years.
Not so this year for the likes of CI’s equal-weight S&P 500 ETF, CI NASDAQ 100 Equal Weight Index ETF and BMO MSCI USA Equal Weight Index ETF.
In the year to date to Aug. 31, The S&P 500 Equal Weight Index has returned 15.6%, compared with 13.1% for the market-cap-weighted S&P 500. Similarly, the NASDAQ-100 Equal Weighted Index has returned 19.9% in the year to date, compared with 17.1% for the traditional NASDAQ 100.
Less successful in Canada
Beating the cap-weighted market was not the case here at home. CI Invesco S&P/TSX 60 Equal Weight Index ETF, which was launched in April 2025, has trailed the S&P/TSX 60 Index over the past 12 months and in the year to date to July 31. During these periods, the heavily weighted Big Six banks and large-cap energy stocks have been major contributors to returns.
“Equal-weight strategies tend to shine when gains are spread across many companies and sectors,” said Griffith. “In these periods, smaller companies in the ETF get a better chance to contribute to returns.”
Regular rebalancing, she added, can also help capture recoveries in previously underperforming stocks. Rebalancing creates a systematic “buy low, sell high” process that trims positions that have appreciated and adds to positions that have declined.
As earnings start to broaden out, rather than being concentrated in several sectors and mega-cap names, an equal-weight strategy is in a better position to capitalize on that relative to a market-cap-oriented strategy, said Rai. “Certainly that’s been the case (in the U.S.) so far this year.”
Rai said there’s a tendency for portfolios that follow the broad market-cap-weighted U.S. index to become overweight in a smaller, select group of names. “Inevitably, you start to see valuations become rich.” Also, as new technologies become more prevalent, “you tend to see broader participation” in various sectors of the market.
U.S. equal-weight strategies tend to offer a modestly higher dividend yield than broad-market cap-weighted strategies. “This is because cap-weighted ETFs are often skewed toward large-cap growth and technology companies, which typically pay lower dividends,” said Griffith. “Equal weighting gives more influence to sectors like financials, industrials and utilities, which tend to be higher yielding.”
While equal-weight strategies reduce concentration risk, they’re not necessarily less volatile than the broad market. That depends on market conditions. Equal weighting introduces other potential sources of volatility, including company size, sector exposure and liquidity. “Equal weighting also involves higher turnover,” said Griffith, “since the ETF rebalances more frequently to maintain equal weights.”
An equal-weight strategy will outperform in certain environments, said Rai. “But that doesn’t necessarily mean that it’s a set-and-forget-it trade. We tend to look at it a little bit more tactically than that.” When you start to see broader participation in market gains among various sectors, “that’s when the tactical element of the equal- weight strategy tends to bear fruit.”
Sector-based strategies
Equal weighting can also be applied to sector-based strategies. Among the most active in this area is Global X Investments Canada Inc.
Its suite of equal-weight Canadian strategies includes the banking, insurance, telecommunications, oil and gas, pipeline, consumer staples, utilities and real estate industries. It also offers equally weighted U.S. banks, U.S. consumer staples and global health-care ETFs.
These ETFs are designed to be pure plays in their respective sectors, with less emphasis on individual stocks, said Jin Li, Global X’s head of product.
Even so, some of Global X’s equal-weight ETFs hold only a few stocks. Global X Equal Weight Banks Index ETF, for instance, holds only the Big Six Canadian banks.
Such a strategy plays into the notion that last year’s bank laggard can often become this year’s performance leader. “Each bank certainly has a different footprint and strength, and areas where they comparatively lack against other peers,” said Li. “What the equal weight in this case does is provide diversification.”
While the Equal Weight Banks Index ETF is an exclusively large-cap portfolio, so too is Global X Equal Weight Telecommunications Index ETF, the largest equal-weight strategy in the lineup. It holds only telecom’s big three: BCE Inc., Rogers Communications Inc. and Telus Corp.
The focus on liquid large-cap companies facilitates Global X’s covered-call and leveraged versions of its Canadian bank and telecom ETFs. As is common in the ETF industry, the covered-call funds create a tax-advantaged income stream from options premiums, while giving up some capital gains in a rising market.
The enhanced versions, along with covered calls, also employ 1.25-times leverage. Li said these equal-weight ETFs can be employed as “recovery trade” vehicles when the investor is fundamentally bullish at a time when the sector has experienced short-term losses.