Australia’s equity market has grown increasingly top-heavy, and advisers are taking notice. With Commonwealth Bank’s valuation recently surpassing $300 billion - cementing its position as the most valuable company on the ASX – concentration risk is once again in the spotlight. Together with ANZ, NAB, Westpac and Macquarie, banks now make up five of the 10 most valuable listed companies¹.

In response, many Self-Managed Super Funds (SMSFs) and advisers are turning to equal-weighted ETFs as a way to restore balance and reduce reliance on a handful of mega-cap names.

A market tilted towards the few

With such a significant portion of investors’ exposure concentrated in a narrow corner of the market, advisers have responded by leaning into strategies designed to restore balance to client portfolios.

‘In this environment, equal-weighted ETFs appear to be finding a role as financial advisers, investors, and SMSFs seek ways to reduce volatility and achieve more diversified exposure’, says Chris Hill, National Manager of Strategic Relationships at AUSIEX. 

‘While traditional ETFs that track indices still dominate the market, equal-weighted ETF’s offer a way to dilute the influence of dominant stocks and give greater emphasis to the market’s underrated mid-caps’, says Mr Hill.

What equal-weighting does differently 

By investing evenly across a broad set of holdings, equal-weighted ETF’s - like VanEck’s Australian Equal Weight ETF (ASX: MVW) which was in the top 10 traded stocks by SMSFs with over $3 million in assets – potentially allows advisers to counter the dominance of mega-cap names by spreading exposure away from the ‘winners’ of the index and toward undervalued or overlooked stocks.

In both Australia and globally, investors in market-cap weighted ETFs are increasingly concentrated in a handful of names. The top 10 stocks in the S&P/ASX 200 now account for around 48% of the index’s total weight, up from around 42-44% a year ago.² The big four Australian banks currently represent almost a quarter of the S&P ASX 200 index, making the returns of ETFs following the index heavily reliant on the performance of these four stocks. 

‘Commonwealth Bank (ASX: CBA) alone represents more than 9% of the index –underscoring the degree to which Australian portfolios are reliant on a small group of companies’, says Mr Hill.

Furthermore, this level of concentration is historically elevated and significantly higher than most developed markets - compared to the S&P 500, where the top 10 stocks make up around 32%.³

Lessons from the US Market 

In the US, the ‘Magnificent 7’ account for around one-third of the S&P 500 Index’s weight.⁴ Collectively, these seven U.S. tech giants - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – have been a significant driver of market-capitalisation-weighted US large cap stock index returns. 

As Dimensional Fund Advisers notes in research “Mag 7 Gravity”, this concentrated exposure can sharply influence index performance in either direction.⁵

In 2024, the S&P 500 returned 25.0% - driven largely by the Magnificent 7, which surged 48.3% over the year, according to Dimensional. The remaining 493 stocks delivered a more modest 15.9%. By early 2025, the dynamic had reversed: the Magnificent 7 fell -12.3% through March 12, while the “S&P 493” declined just 0.8%.⁶

‘This kind of sudden reversal underscores a key vulnerability of market-cap weighted indices’, according to Mr Hill - a momentum bias that can leave portfolios overexposed to overvalued stocks late in the cycle.

It is precisely this risk that the first equal-weighted index, the S&P 500 Equal Weight, was designed to counter when it launched in 2003. 

Equal weighting may be gaining ground in Australia

‘Now, as concentration risk has deepened in the Australian market, equal-weighted strategies may provide one of the few systematic ways to offset this growing imbalance’, says Mr Hill. By systematically rebalancing exposure away from frothy valuations and toward a more balanced cross-section of the market, investors can potentially avoid the momentum bias inherent in market-cap weighted indices.

AUSIEX data from May 2025 reveals that the top 10 stocks bought by larger SMSFs with holdings in excess of $3m (as at 3/6/2025) appear to show interest in equal weighted ETFs, with Van Eck’s Australian Equal Weight ETF (ASX: MVW) appearing within the top 10 most traded and top 5 most bought stocks for May 2025. 

Top traded stocks and top bought ETPs in May for larger SMSF accounts with holdings over $3m as at 3/6/2025 (Source: AUSIEX). 

There are a number of equal weight ETFs available on ASX, including Betashares S&P 500 Equal Weight Currency Hedged ETF (ASX: HQUS), Betashares S&P 500 Equal Weight ETF (ASX: QUS), VanEck Geared Australian Equal Weight Complex ETF (ASX: GMVW), and BetaShares NASDAQ 100 Equal Weight ETF (ASX: QNDQ).

How equal-weighting works – and why it matters

Equal-weighted index ETF are rebalanced regularly, ensuring the strategy maintains equal weightings across all constituents of an index. This helps to ensure a more balanced approach by giving smaller companies the same exposure as larger ones. It results in a more diversified portfolio compared to capitalisation-weighted ETFs where just a few companies can potentially dominate performance. 

In terms of performance, VanEck research highlights that equal-weighted strategies can outperform market-cap-weighted indices over the long term due to what is called the ‘structural rebalancing effect.’⁷ Because the strategy involves systematically trimming stocks that have risen in price and adding to those that have fallen, equal-weighted portfolios inherently apply a disciplined buy-low, sell-high approach.

This repeated rebalancing can potentially generate a “rebalancing premium” – a potential source of return that market-cap weighted strategies do not capture.

By weighting all companies in an index equally, and ‘assuming’ undervalued companies perform better in the longer term, the overall return could surpass that of a traditional ETF index fund, VanEck says.⁸

That said, both advisers and investors need to consider the trade-offs: more frequent rebalancing increases turnover and costs, which may offset the benefits of increased returns. 

Vanguard also notes that while equal-weighting changes the risks, it does not eliminate them. Equal-weighted indices requiring regular rebalancing, resulting in higher costs for the investor than market-cap-weighted equivalents.⁹

Mr Hill adds ‘obtaining appropriate financial advice is important before switching ETF holdings. Equal-weighted strategies offer diversification benefits, particularly in concentrated markets - but come with trade-offs that should be weighed up carefully’.

To find out more about how to optimise your ETF trade execution, contact your Account Manager or a member of our Business Development team.

¹ https://www.afr.com/policy/economy/wshouldn-t-celebrate-commonwealth-bank-s-300b-value-20250605-p5m56p
² Source: SSGA, as at 30 April 2025, S&P Dow Jones Indices, latest factsheet for S&P/ASX 200.
³ https://www.forbes.com/sites/investor-hub/article/top-sp-500-stocks-by-weight
⁴ https://www.dimensional.com/us-en/insights/mag-7-gravity
⁵ https://www.dimensional.com/us-en/insights/mag-7-gravity
⁶ https://www.dimensional.com/us-en/insights/mag-7-gravity
⁷ https://www.vaneck.com.au/globalassets/home.au/media/managedassets/library/assets/white-papers/new-research---why-equal-weighting-outperforms-the-mathematical-explanation.pdf
⁸ https://www.etfstream.com/education/investing/equal-weight-etfs-benefits-and-risks
⁹ https://www.vanguard.co.uk/professional/insights-education/insights/what-to-consider-when-choosing-between-index-weighting-approaches