Market leadership in the U.S. large-cap names has been increasingly dominated by a narrow opportunity set of mega-cap stocks, with the seven biggest stocks, aka “Magnificent 7”, making up almost 30% in terms of market capitalization of the S&P 500 Index and almost 60% of the index’s return in 2023.¹

The current market circumstances present an opportunity for investors to re-evaluate equal weight approaches in U.S. equities. If the risks of the market are concentrated into a select few, high-momentum mega-cap names, one way to manage that risk is to de-allocate from the very largest stocks and rebalance away from recently outperforming constituents. E-mini S&P 500 Equal Weight futures offer a means of getting alternative exposure.

By design, the S&P 500 Equal Weight Index is a more diversified version of the U.S. large market cap stocks as represented by the S&P 500 Index, a market cap representation. The ability to avoid concentration in the largest stocks and the discipline of regular rebalancing are virtues sometimes ascribed exclusively to active management – both are encoded in the S&P 500 Equal Weight Index. 

While the weight of the largest 50 names within the S&P 500 remain unchanged around 55%, the largest seven stocks reach elevated levels of 30%.

Reduce concentration of large-cap U.S. allocation

Historical studies suggests that a relationship exists between the concentration and the relative performance of equal weighting: After peaks in S&P 500 concentration, the S&P 500 Equal Weight Index tended to outperform.²  The overall performance of equal weight indices seems to be closely tied to trends in concentration as documented in outperformance in equal weight-indices.

Less crowded than parent market cap index 

Equal weight indices typically display other characteristics that distinguish their performance from capitalization-weighted benchmarks, the most obvious of which is a greater participation in the performance of smaller companies. If larger stocks outperform smaller ones, concentration will increase and equal weight will underperform. Similarly, if smaller stocks outperform, concentration will decrease, and equal weight will outperform.

Changes in market concentration levels have a natural impact on the performance of an equal weight index. As the largest stocks outperform, the market becomes more concentrated in those names and all else being equal, the market cap-weighted indices will outperform equal weight indices. 

Furthermore, in a low-correlation environment, an equal weight index may also offer an effective way to:

1. benefit from the diversification return via a regular re-balancing schedule,
2. potentially benefit from “reversion to the mean” in equity market concentration and valuations. 

The S&P 500 Equal Weight Index went live on January 8, 2003. The index’s total return since launch is not only higher than its large-cap benchmark index, but also higher than S&P DJI’s benchmarks for the mid- and small-cap U.S. equities. Similarly, the price return for S&P 500 Equal Weight Index has also outperformed its large-cap benchmark index, S&P 500 Index (see Exhibits 3 and 4). 

The difference in performance between the S&P 500 Equal Weight Index and the S&P 500 Index is frequently material, which means that it may have a potential explanatory power for the relative performance of other large-cap U.S. equity portfolios or indices. Size exposure alone explains a considerable portion of the S&P 500 Equal Weight Index’s long-term returns.³

S&P 500 Equal Weight Index performance 

• The S&P 500 Equal Weight Index underperformed the S&P 500 by 12% in 2023. 
• In January 2024, the underperformance continued with a further decline of 3% 
• Nine out of 11 equal weight sectors underperformed their cap-weighted counterparts. 
• Technology was the top performer over the past 12 months for equal weighted and cap weighted.

Source: SPDJI, Bloomberg, as of January 31, 2024

Equity index futures and options are important tools portfolio managers use to maximize capital efficiencies, minimize portfolio risks, execute both long and short positions and generate portable alpha. Key benefits of futures, include, but are not limited to:

Liquid granular execution strategies

• Transparency and strength: The E-mini and Micro E-mini S&P 500 futures order book drives $425B notional to be traded daily. This is over 10 times the combined volume of all S&P 500 ETFs and equivalent to over 20 times the implied liquidity of the S&P 500 basket constituents. This permits E-mini products to be the benchmark tools for global equity risk price discovery.
• Versatility to manage positions and transparency: Flexible execution, including Basis Trade at Index Close (BTIC), block trades and liquid screen trading capabilities offer multiple ways to manage liquidity risk.
• Taking a short position: For futures, entering a short position is operationally equivalent to entering a long position. 

Capital Efficiencies

• Optimize capital deployment: Efficiency is improved through technology and operational protocols and is more convenient with one clearing house.
• Cash equitization: Uninvested cash balance causes a “drag” on performance. Use in cash equitization strategies to efficiently manage cash or gain efficient beta exposure when faced with periodic cash contributions and redemptions.
• E-mini S&P 500 Equal Weight futures is currently margined at 5% (USD 6,100) and subject to change.

Potential tax advantages and margin offsets

• Tax treatment: Equity futures may be exempt from certain U.S. tax rules and may not be treated as income for the purposes of the ordinary U.S. income tax framework.⁴
• Margin offsets: Traders may qualify for margin offsets with other CME Group contracts, including offsets specific to the highly correlated E-mini S&P 500 futures.

Operational ease to express views

• Size factor rotation: Use factor rotation strategies to express views within a portfolio or to execute relative value or under/over factor weighting strategies against the S&P 500 parent index.
• Spread trading: Capture spreading opportunities vs. constituent stocks of a factor portfolio or other equity indices or use to create a portfolio overlay to hedge factor risk.

Around-the-clock trading with expiries along the curve

• Investors can manage risk nearly 24/7 through CME Globex and bilateral block trading, so traders can be prepared when markets move.
• Range of expiries: Over five concurrent quarterly futures expiries will be available on the E-mini S&P 500 Equal Weight contract, which allow investors to fine-tune their exposure. 

Source: CME Group

The S&P 500 Equal Weight Index (the Index), administered, calculated, and published by S&P Dow Jones Indices LLC (SPDJI). The Index composition is the same as that of its underlying index, the S&P 500 Index. Each company is equally weighted as of the respective rebalance reference date, rather than weighted by float-adjusted market capitalization.⁵

The Index includes 503 securities, based on both market capitalization and current index membership. The Index measures the performance of the large-cap segment of the U.S. market. Considered to be a proxy of the U.S. equity market, the Index is composed of 500 constituent companies.

The S&P 500 Equal Weight Index is rebalanced quarterly after the close of business on the third Friday of March, June, September and December. The Index also rebalances quarterly on the third Friday of each calendar quarter for number of shares, free floats, IPOs and investability criteria.

For the quarterly rebalancing, the reference date to meet the eligibility criteria is five weeks prior to the rebalancing effective date (defined as the close of business on the third Friday of March, June, September and December). Constituent selection is at the discretion of the SPDJI Index Committee and is based on the eligibility criteria. The Index has a fixed constituent company count of 500.

Each constituent company of the Index must meet the following criteria at the time of such rebalancing.⁶

As of February 7, 2024, the S&P 500 Index comprises 500 constituent firms, with an aggregate market capitalization of $41.94 trillion. The following statistics describe the distribution of Index constituent companies in terms of their individual market capitalizations (in $ billion):

The largest single constituent company represents 7.34% of the S&P 500 Index’s weight. The largest 10 constituents represent 32.47% of the S&P 500 Index’s weight.

S&P 500 Equal Weight Index methodology 

Index composition for the S&P 500 Equal Weight Index is the same as that of the S&P 500 Index. Each company is equally weighted as of the respective rebalance reference date, rather than weighted by float-adjusted market capitalization.

The S&P 500 Equal Weight Index is rebalanced after the market close on the third Friday of March, June, September and December with weights set to 1/N for each company in the index where N equals the number of companies in the index at rebalancing, i.e., 1/500 = 0.2%. At each quarterly rebalancing, companies are equal weighted using closing prices as of the second Friday of the quarter-ending month as the reference price. For those companies having multiple share class lines in the index, each share class line is assigned a weight that is proportional to its float-adjusted market capitalization (FMC) as of the second Friday pricing reference date. Since index shares are assigned based on prices one week prior to the rebalancing, the actual weight of each company at the rebalancing differs from the target equal weights due to market movements.

In between dates this will vary due the price action of the stocks and hence why the constituent weightings will change. As of February 7, 2024, the S&P 500 Equal Weight Index comprises 500 constituent firms. 

The largest single constituent company signifies 0.28% of the Index’s weight. The largest 10 constituents represent 2.457% of the Index’s weight.

1. Source: SPDJI (S&P Dow Jones Indices LLC). Investment Strategy: Factors
2. Towering Tech,  Concentration within Sectors and Its Implications for Equal Weighting
3. Equally Weighting within Sectors: Impact and Potential Applications
   
   For an outline of the drivers behind the historical relative performance, see Edwards et al, “Outperformance in Equal-Weight Indices”
4. Not intended as tax advice. Please consult a tax advisor and/or FCM for more information.
5. GICS: Global Industry Classification Standard.
6. The following paragraphs on index methodology are adapted from S&P U.S. Indices Methodology, S&P Dow Jones Indices, October 2023 at: S&P U.S. Indices Methodology.