ETF Weighting Matters More Than You Think
For many investors, diversification is as simple as owning a broad-market index fund that holds hundreds or maybe even thousands of stocks. These broad-market funds are amazing tools that can provide low-cost exposure to a targeted basket of stocks, but in today’s top-heavy stock market, many investors may be misled about how diversified they truly are.
Reweighting
Many of the most popular US broad-market index funds look strikingly similar in their top holdings. That’s largely because they weight holdings by market cap, a methodology that keeps turnover low and trading costs minimal. But it also pushes more portfolio weight into the biggest firms, so diversification erodes as a handful of mega-caps grow their market share.
Investors who want to reduce mega-cap concentration can use equal-weighted or fundamentally weighted strategies. These approaches use different metrics to distribute weight across holdings and limit the influence of the largest stocks. Yet, they also come with a trade-off. Once you stop weighting by market cap, you inevitably tilt the portfolio toward stocks with different characteristics. It could mean favoring smaller firms, cheaper valuations, or different sectors. The result is a portfolio that may balance its weight to individual names, but it will likely look and behave materially different from a cap-weighted benchmark.
When a handful of stocks drive index returns, diversification depends less on how many holdings you own and more on how the portfolio is weighted. Market-cap weighted exchange-traded funds, equal-weighted ETFs, and fundamental-weighted ETFs can all have “broad-market exposure” because they hold every stock, but the weighting differences deliver different concentration profiles, growth/value tilts, and size biases.
Three Diversified ETFs
Three ETFs can help illustrate the pros and cons of different weighting approaches. Each ETF roughly targets the 1,000 largest companies in the US stock market. The table below summarizes these distinct strategies.
Market-cap-weighted indexes assign each stock a weight proportional to its float-adjusted market value, which makes the portfolio a close representation of the market that’s available to investors. The advantages are simplicity, transparency, and typically lower turnover. The portfolio weightings adjust as prices move, removing the need for trades that keep positions in line with targets. This is the dominant structure for broad-market indexing, and it’s difficult to beat. IShares Russell 1000 ETF IWB serves as a great example of a market-cap-weighted ETF. It seeks to track the Russell 1000 Index, providing broad exposure to the 1,000 largest US stocks.
Equally weighting the same stocks in IWB’s portfolio reduces concentration by distributing weight more evenly across holdings at each scheduled rebalance. This requires trimming winners and buying laggards. That rebalance can materially change how a portfolio performs against a cap-weight benchmark and drives higher turnover. Invesco Russell 1000 Equal Weight ETF EQAL tracks the Russell 1000 Equal Weight Index, which weights each of the 11 sectors equally and then weights each stock within its given sector equally.
Fundamental weighting breaks the link between price and weight by anchoring weights to a company’s fundamentals, instead of allowing top-performing stocks to dominate simply because their market price has ballooned. RAFI indexes combine metrics like book value plus intangibles, sales adjusted for leverage, operating cash flow plus research and development expenses, and dividends plus buybacks to weight stocks by a combination of their fundamental values.
Invesco RAFI US 1000 ETF PRF applies that approach to the 1,000 largest US stocks rather than weight by price. The result is often a portfolio that looks broad in number of holdings but lands on the value side of the Morningstar Style Box.
Style Shift
The market-cap-weighted IWB lands in the large-blend quadrant of the style box with its ownership zone reaching into the top mid-cap stocks, as well as up into mega-cap growth territory. This makes sense given that the fund concentrates most of the portfolio in the largest names, so the portfolio tilts upward toward the top of the style box.
The top of the portfolio is filled with the expected mega-cap growth stocks like Nvidia NVDA and Apple AAPL. However, large-value stocks also appear among the fund’s top holdings. Companies like Johnson & Johnson JNJ, JPMorgan JPM, and Berkshire Hathaway BRK.B are a large part of the portfolio and have held significant weight for most of the fund’s life.
Fundamental weighting leads PRF to underweight the largest growth stocks whose prices have outrun their fundamentals and overweight stocks that look cheaper relative to those same metrics. This creates a buy-low/sell-high effect that has allowed PRF to remain in the large-value segment of the style box through shifting market environments. It places more weight on stocks as they get cheaper, wherever they can be found among the 1,000 largest US stocks. Its fundamental measures still allow it to tilt toward large names like Apple and Alphabet due to their relatively robust earnings and financial health.
Equal weighting reduces the dominance of mega-caps by design, which tends to pull EQAL down the style box’s size axis away from the large-cap segment and toward the center of mid-cap territory. EQAL underweights Apple by roughly 6.25% and Nvidia by 7%. The tilt toward smaller stocks is much more significant and stable than its tilt toward cheaper stocks. Historically, it has remained in the mid-cap blend segment of the style box, only shifting into value territory over the past few years as the largest stocks have become more growth-oriented.
A Contrarian Take
The style box is helpful in seeing how an ETF’s weighting approach affects its size and style, but it doesn’t tell you as much about its impacts an ETF’s concentration. The chart below shows how IWB, EQAL, and PRF have allocated assets across their top holdings over the past decade.
A decade ago, PRF and IWD had roughly the same percentage of assets allocated to their top 10 holdings. But as mega-cap growth companies continued to climb higher, IWB’s cap-weighted allocation to its top holdings jumped from 15.5% to over 36.0% at the end of 2025. Both the equal-weighted EQAL and fundamentally weighted PRF have seen an increase in their top 10 holdings, but nowhere near the degree of IWB.
Different weighting approaches can also alter the sector composition, and tracking sector weightings over time helps pinpoint where mega-cap leadership has concentrated. The chart below shows how each fund’s allocation to information technology has shifted over the past decade.
IWB’s rising top 10 concentration has coincided with a meaningful sector shift. Its allocation to information technology climbed to nearly 37.0% from roughly 19.5%. That’s exactly how cap weighting transmits market performance into portfolio weighting. When a sector’s stocks rise in price, so do their index weightings.
The market cap of companies like Nvidia, along with other mega-cap tech leaders, has grown rapidly in recent years, and market-cap-weighted ETFs like IWB naturally allocate more to those winners as their prices and market caps climb. What began as broad exposure can slowly transform into a larger implicit bet on the market’s dominant sector, with the same few names influencing both the fund’s style profile and its sector footprint.
By contrast, the alternative weighting schemes of EQAL and PRF break this link.
EQAL limits sector dominance explicitly. Its underlying index is designed to be equally weighted across sectors, with each stock receiving equal weight within its sector. That structure naturally produces a much flatter sector profile and keeps individual-stock influence minimal.
PRF rarely sees any sector exceeding 20% of the portfolio despite not having any explicit cap on sector concentration. It’s fundamental weighting shifts away from overvalued sectors by design and places more weight on areas where fundamentals are large relative to market price. This means sector exposure becomes a byproduct of its focus on fundamentally large stocks rather than market enthusiasm.
Broad Does Not Equal Diversified
Broad-market ETFs remain one of the most effective wealth-building tools for the masses. Each of the three ETFs discussed is transparent, low-cost, and gives investors instant exposure to roughly 1,000 stocks. But the past decade has highlighted a subtle flaw in the diversification of cap-weighted indexes.
When market leadership narrows, diversification becomes less about how many stocks a fund owns and more about how it allocates weight among them. A market-cap-weighted ETF like IWB is designed to reflect the market as it exists. It will naturally become more concentrated as the biggest companies get bigger. That feature can be cost-efficient, but it also leads performance to be driven by a small set of mega-cap companies, as we see today.
Alternative weighting schemes can help alleviate the risks associated with market-cap weighting. Despite each strategy roughly starting with the same 1,000 stocks, differences in weighting methodologies used drive differences in size exposure, value/growth lean, sector footprint, and the degree of concentration.
In a market where a handful of stocks dominate its return, understanding how your ETF weights its holdings is one of the clearest ways to understand how diversified you really are.
