One year on from when we last discussed the relative merits of active ETFs vs. an equal-weighted index approach, today US equity investors are contending with even more extreme levels of index concentration in the S&P 500.
While a shift from a market-cap approach to an equal-weight index may seem like an easy fix for this issue, we believe that it’s essential for investors to understand the significant risks that result from such a decision – particularly when active ETF options are also at their disposal.
Changing correlations have shifted investor preferences
Unlike the more traditional approach of weighting stocks in accordance with each company’s market capitalisation, equal-weighted indices assign every stock the same weight. As a result, equal-weighted ETFs award every company that they invest in the same importance, regardless of their fundamentals, and maintain underweight positions in larger companies and overweight positions in smaller names relative to their market-cap weighted equivalents.
Nevertheless, with the market-cap and equal-weight versions of the S&P 500 holding exactly the same constituents, historically the returns from both indices have been highly correlated. This relationship has become less consistent since the pandemic, particularly in 2024 when correlations fell sharply.
The increasingly differentiated risk profile of the two benchmarks can be largely explained by the increased dominance of a handful of megacap companies in the market-cap index, many of which are linked to artificial intelligence (AI). The weight of the largest 10 stocks in the traditional S&P 500 index has risen from 26% in January 2023 to 40% as of 31 January 2026, according to data from S&P Global. With each company in the equal weighted index receiving a weight of 0.2% (1/500), the allocation to the largest 10 stocks in an equal-weight index is almost 39 percentage points smaller.
Last year, correlations between the two approaches broke down once again, but unlike in 2024, the reason for this shift was due to market-cap weight outperformance. With the tech giants making a strong recovery following April’s trade-related turbulence, the equal-weight index underperformed the traditional index by 6 percentage points in total return terms over the course of 2025, according to S&P Global data.
Lower returns may be perfectly acceptable for investors if they are achieved with significantly lower risk. Yet, while equal-weight investors did witness lower volatility last year, the reduction was only minor, with each index seeing a drawdown of more than 15% between February and April. Over longer periods, the volatility of the two indices has been broadly similar, with the equal-weight index actually having a higher volatility than the marketcap weight approach over a 10-year horizon.
Despite the shortcomings of an equal-weight approach, it’s undeniable that today’s levels of index concentration are creating challenges for investors. A potential shift in earnings composition ahead makes this issue especially timely. In 2025, tech sector earnings growth outpaced the broad US market by 14 percentage points. While tech is still expected to see strong earnings growth this year, our analysts see double-digit earnings growth across a much wider range of sectors, with Financials, Consumer Cyclicals, and Industrials/Commodities all expected to join the earnings party.
How J.P. Morgan Asset Management’s active US equity ETFs can help
We have a constructive view on the US equity market. For 2026, our fundamental research analysts are forecasting 14% earnings growth year-on-year, supported by another year of 25% earnings growth from the Magnificent Seven, but also by 11% earnings growth from the other 493 stocks in the S&P, highlighting a broadening out of earnings growth. This forecast includes low double-digit growth from sectors such as financials and healthcare.
That said, we are cognisant of potential risks and dynamics that may give investors pause. The market has had a great run: the S&P 500 has delivered a total return of more than 86% in US dollar1 terms over the last three years. The index has also become more concentrated, with the top 10 holdings making up more than 40% of the S&P 500, and valuations are elevated, with a forward price-to-earnings (P/E) ratio of 22.0x compared an average of 17.1x over the last 30 years (as of 31 December 2025).
Investing in equal-weighted indices presents an opportunity to address issues such as concentration and valuation, but in a blunt way. An equal-weighted approach also introduces other challenges: they are higher turnover, they are anti-momentum (selling the winners to reinvest in the losers), and they don’t always dampen volatility. Quite simply, they only aim to reflect the average performance of all the stocks in the index. We believe investors can do better than average. J.P. Morgan’s range of active US equity UCITS ETFs can help address many of the challenges faced by investors, in a thoughtful, research-driven approach.