An Equal Weight approach reduces the concentration risk inherent in market-cap weighted equity indices
Equal Weighted indices employ a common-sense approach of automatically “buying low and selling high” at each rebalance
Invesco has expanded its Equal Weight range by launching the first UCITS ETF tracking the MSCI Europe Equal Weighted Index
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Equal Weight exposures have been enjoying a resurgence amid growing investor interest in equity strategies that offer diversification and help reduce concentration risk. The volatility that shook markets in 2024 shined a light on the high valuations of mega-cap US tech stocks in particular, but it also served as a reminder of the potential benefits of an equal weight approach. This common-sense alternative to traditional market-cap weighting is now also available for broad European and World equity exposures via Invesco UCITS ETFs.
Equal Weighted indices are designed to provide exposure to the same constituents as their parent market-cap-weighted indices, but they equally weight each company at each rebalancing date, typically on a quarterly schedule. This process effectively removes the influence of the constituents’ current prices using a rules-based, automated process of selling high and buying low.
A standard index such as MSCI Europe or MSCI World weights the constituents by size, with the result being that the largest companies contribute more to the index performance than smaller companies. For example, the top 10 stocks comprise 21% of MSCI Europe and 25% of MSCI World in terms of their market capitalisation despite being tiny fractions of the number of stocks comprising those market-cap-weighted indicesi. That concentration can be an advantage in a highly momentum-driven market when the largest stocks are performing well but can pose a significant risk in volatile or falling markets.
Combating this concentration risk is where an equal-weight approach can provide a simple solution. At each rebalance, stocks that have outperformed the index are reduced and those that underperformed are increased, so that all stocks in the index again have the same weight.
The MSCI Europe Index includes more than 400 stocks, while MSCI World has around 1,400. Equal weight investors in either index gain more exposure to the smaller stocks, which often have different growth drivers than the mega-cap names at the top of the standard index. Smaller sized companies have historically driven higher growth over the long term, although tend to have higher volatility in shorter time periods.
The differences in geographical and sector exposures are also worth noting. For instance, while the US comprises over 70% of the standard MSCI World index, it’s only around 40% of the equal-weight variant. Japan receives the largest uplift with an allocation of around 15% compared to 5.8% in the standard index. In fact, investors gain more exposure to all other markets through an equal weight approach. In general, MSCI Equal Weighted Indices offer a more balanced exposure from both the geographic and sector perspectives.
Source: Bloomberg, as at 31 December 2024
Source: Bloomberg, as at 31 January 2025
Our UCITS ETF is the first in Europe to track the performance of the MSCI Europe Equal Weighted Index, which comprises the same constituents as the MSCI Europe Index but equally weights each company at each rebalance, rather than weighting the companies by size.
An investment in this fund is an acquisition of units in a passively managed, index-tracking fund rather than in the underlying assets owned by the fund.
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