Breaking news! The president has made an announcement regarding federal student loan forgiveness.
Refi now and save money before rates rise again. Learn more

What Is an Equal-Weighted Index? How to Calculate It

February 24, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is an Equal-Weighted Index? How to Calculate It

When implementing an index investing approach, it’s important to understand what an equally weighted index is.

Index investing is a passive investment strategy in which the primary goal is to match the returns of a particular stock index. This is usually achieved through investing in index mutual funds and exchange-traded funds (ETFs).

Equal-weight investing is a smart beta strategy that may appeal to certain types of investors more than others. This article will delve deep into equal-weight investing, including:

•  What Is an Equal Weighted Index?
•  How to Calculate Equal Weighted Index
•  Advantages of Using Equally Weighted Index
•  Disadvantages of Using Equally Weighted Index

What Is an Equal Weighted Index?

An equal-weighted index is a stock market index that gives equal value to all the stocks that are included in it. In other words, each stock in the index has the same importance when determining the index’s value, regardless of whether the company is large or small, or how much shares are trading for.

A stock market index tracks the performance of a specific grouping or basket of stocks or a particular sector of the market. For example, the S&P 500 Composite Stock Price Index tracks the movements of 500 companies that are recognized as leaders within their respective industries.

Stock market indices are often price-weighted or capitalization-weighted. In a price-weighted index, the stocks that have the highest share price carry the most weight. In a capitalization-weighted index, the stocks with the highest market capitalization carry the most weight. Market capitalization represents the value of a company as measured by multiplying the current share price by the total number of outstanding shares.

An equally weighted index essentially puts all of the stocks included in the index on a level playing field when determining the value of the index. With a price-weighted or capitalization-weighted index, on the other hand, higher-priced stocks and larger companies tend to dominate the index’s makeup and dictate its performance.

How to Calculate Equal-Weighted Index

To calculate equal weighted index, you need to know two things:

•  Share price of each stock that’s included in the index
•  Total number of stocks included in the index

If you’re calculating equal-weighted index value for an index that has five stocks in it, each one would be weighted at 20%, regardless of its stock price. To find equal-weighted index value, you would simply add the share price of each stock together, then multiply it by the weight.

So for example, say an index has five stocks priced at $100, $50, $75, $90 and $85. Each one would be weighted at 20%.

Following the formula, you would add each stock’s price together for a total of $400. You’d then multiply that by the 20% weighting to arrive at an equal weighted value of 80. As fund turnover occurs and new assets are exchanged for old ones or share prices fluctuate, the equally weighted index value can be recalculated.

The equally weighted index formula can be used to determine the value of a particular index. You may want to do this when determining which index ETF to invest in or whether it makes sense to keep a particular index mutual fund in your portfolio.

Best Investment App of 2022

– Motley Fool

Trade stocks, ETFs, and crypto – or start an IRA.
Get up to $1k when you fund an account today.

**Customer must fund their Active Invest account with at least $10 within 30 days of opening the account.
Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Advantages of Using Equally Weighted Index

An index investing strategy might be preferable if you lean toward more conservative investments or you simply want exposure to a broad market index without concentrating on a handful of stocks. That’s something you’re less likely to get with mutual funds or ETFs that follow a price-weighted or capitalization-weighted index.

Here are some of the reasons to consider an equal-weighted index approach:

•  It will increase diversification in your portfolio while potentially minimizing exposure to risk.
•  It’s relatively easy to construct an equally weighted portfolio using index mutual funds and ETFs.
•  It may appeal to value investors, since there’s less room for overpriced stocks to be overweighted and undervalued stocks to be underweighted.
•  Equal-weighted indices may potentially generate better or more incremental returns over time compared to price-weighted or capitalization-weighted indices.

Cap-weighted indices and the funds that track them can be risky since performance is ultimately determined by just a handful of stocks. As long as those top stocks do well, then any funds or ETFs that track the index may follow suit. But equal-weighted index funds could offer more consistent returns over time.

Of course, it’s important to remember that where the stock market is concerned, nothing is guaranteed, and there’s always a risk that equal-weighted index funds may underperform.

Disadvantages of Using Equally Weighted Index

While there are some pros to using an equal weighted approach, it may not always be the best choice depending on your investment goals. In terms of potential drawbacks, there are two big considerations to keep in mind:

•  Equal-weighted index funds or ETFs that have a higher turnover rate may carry higher expenses for investors
•  These funds may also be more susceptible to volatility in bear market environments

There may be a constant buying and selling of assets that goes on behind the scenes to keep an equal-weighted mutual fund or ETF in balance. Higher turnover ratios, i.e. how often assets in the fund are swapped in and out, can lead to higher expense ratios if a fund requires more active management. The expense ratio is the price you pay to own a mutual fund or ETF annually, expressed as a percentage of the fund’s assets. The higher the expense ratio, the more of your returns you hand back each year to cover the cost of owning a particular fund.

Equal-weighted index funds can also be problematic in bear market environments, which are characterized by an overall 20% decline in stock prices. During a recession, cap-weighted funds may outperform equal-weighted funds if the fund is being carried by a few stable, larger companies.

The Takeaway

In an equal-weight index fund, each stock counts equally toward the index’s value, regardless of whether the company is large or small, or how much shares are currently trading for. There are advantages to investing in an equal-weight index fund over a capitalization-weighted index or price-weighted index, for example equal-weighted indices may generate better or more consistent returns. Investing in an equal-weight index may be appealing to investors who prefer a value investing strategy or who want to diversify their portfolio to minimize risk.

With a SoFi Invest online trading account, you can begin building your portfolio with as little as $1. You can follow a DIY path by choosing which stocks or ETFs to invest in, or choose an automated investing experience.

Find out how to get started with SoFi Invest.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender