Stock Index Weighting Matters

The S&P 500 is up this year, handily outperforming other stock market gauges.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

The U.S. stock market is absolutely levitating. With the economy still in the throes of a painful coronavirus-fueled downturn, stocks have defied the odds to rise into the green for the year, pulling within 2.4% of their all-time highs.

At least that’s the snapshot of the market you’d get by looking at the SPDR S&P 500 ETF Trust (SPY), the largest ETF tracking U.S. stocks. Thanks to its composition, the fund is up 3.6% year-to-date— but that’s certainly not representative of the return achieved by the average stock in the market.

For that, one can look at something like the Invesco S&P 500 Equal Weight ETF (RSP) or the iShares MSCI U.S.A. Equal Weighted ETF (EUSA), which are down 5.7% and 4.1%, respectively, on a year-to-date basis. Both funds are still down about 9% from their all-time highs.

Big Get Bigger

The divergence can be traced to the makeup of the ETFs. The S&P 500 Index underlying SPY is market-cap-weighted, meaning larger companies get a larger weighting in the fund. In an environment where the big have gotten bigger, that’s been an advantage for SPY.

The S&P 500’s five largest holdings—Apple, Microsoft, Amazon, Alphabet and Facebook—together make up nearly 23% of SPY. Turbocharged by the work-and-play-from-home coronavirus environment, returns for those stocks have ranged from 10% (for Alphabet) all the way up to 70% (for Amazon) so far this year.

It’s no wonder then that SPY, with almost a quarter of its portfolio in these heavyweights, has done so well.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Apple = Delta Airlines

While SPY has ridden its oversized positions in megacaps and technology (the sector makes up 28% of the fund) to outperformance, RSP and EUSA have been hurt by their much smaller exposure to those stocks.

As their names suggest, the two ETFs equal weight their holdings, giving the same importance to a stock like Apple, with a $1.9 trillion market cap, as to a stock like Delta Airlines, with a $16 billion market cap.

RSP’s holdings include all the stocks in the S&P 500, while EUSA takes its stocks from the MSCI USA Index, a broader index that includes midcaps.

As one can imagine, giving the same weighting to soaring tech stocks as beaten-down airlines would be a net negative at a time like this. RSP and EUSA hold about 15% and 18%, respectively, of their portfolios in technology, a significant weighting, but well below the S&P 500’s tech exposure.

The two funds are much more exposed to struggling areas of the economy like industrials and financials, hindering their ability to snap back as much as SPY.

Missing Blue Chips

As the returns for SPY, RSP and EUSA suggest, not all stock market indices are created equal. The Dow Jones Industrial Average, the famous U.S. stock market gauge with a 124-year history, is another case in point. The SPDR Dow Jones Industrial Average (DIA), an ETF that tracks the 30-stock index, is down 4.7% year-to-date.

YTD Returns For SPY, RSP, DIA

Considered an exclusive index, the Dow has historically held stocks of the titans of American industry, the bluest of the blue chips. But due to the quirky nature of the index, whereby the Dow weights its holdings based on share price, it has been unable to include key stocks like Amazon or Google, because their high stock prices would lead them to completely dominate the index.

Instead, the Dow holds enormous positions in stocks like Home Depot (7%), Goldman Sachs (5%), McDonald's (5%) and Boeing (4%).

The index also holds large positions in strong tech performers like Microsoft (6%) and Apple (11%), its largest holding. But those haven’t been enough to offset the laggards.

Incidentally, earlier this week, Apple announced a share split, which will increase its shares outstanding by a factor of four, and reduce its share price to a quarter of what it currently is. For the most part, the split is merely cosmetic; it won’t affect much of anything. But in the case of the Dow, which happens to be price weighted, Apple’s share of the index will fall dramatically. (Read: Apple Split To Take Bite Out Of DIA)

After the split, Apple will have a share price close to that of Travelers Companies, which has a 3% weighting in the Dow.

The Tech-Heavy Nasdaq

Not all U.S. stock market gauges have been underperforming the S&P 500. The last of the big three, along with the S&P and Dow, is the Nasdaq, and it’s been roaring higher.

The Nasdaq Composite is a quirky index and perhaps even more arbitrary than the Dow. It’s a market-cap-weighted index, but one that only selects its holdings from those stocks listed on the Nasdaq exchange. If a stock is listed on the rival New York Stock Exchange, you won’t find it in the index.

Fortunately for the Nasdaq Composite, many of this year’s high-flying stocks, including the big five megacaps, are listed on the Nasdaq exchange. The big five—Apple, Microsoft, Amazon, Alphabet and Facebook—together make up 39% of the Nasdaq Composite, fueling the index to gains of 22.2% so far this year.

The Fidelity NASDAQ Composite Index Tracking Stock (ONEQ), which tracks the index, holds a whopping 42% of its portfolio in the tech sector (Amazon, Alphabet and Facebook aren’t classified as technology stocks in this instance).

With more concentrated exposure to the megacaps and tech than even SPY, it’s not surprising to see the Nasdaq and ONEQ performing so well this year.

Different Snapshots

A solid 3.6% return for the S&P 500, a disappointing 4.7% loss for the Dow, and a stunning 22.2% windfall for the Nasdaq—the snapshot of U.S. stock market returns has varied significantly this year.

Which represents the “true” market? Well, there’s no right answer. If you want a representation of the majority of investors’ experience, then the S&P 500, which has $4.6 trillion tracking it, is probably the best gauge. If you want to see what the average stock is doing, then the 5.7% loss for RSP might be more telling.

The Dow and Nasdaq probably aren’t the best indices to track, given how arbitrary they are, but for historic reasons, you’ll still often hear them mentioned in the media, so it’s worth knowing why they’re doing what they’re doing.

One final point—just because certain indices are outperforming this year, doesn’t mean they will outperform going forward. As always, past performance is no guarantee of future results.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2



Sumit Roy is the senior ETF analyst for, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for, with a particular focus on stock and bond exchange-traded funds.

He is the host of’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays,’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.