The Subtle Edge of Balance: Market vs. Equal Weight Indexes

Every cycle has its favourites. A few companies grow so big, so fast, they start to look like the market itself. Today, it is the usual list: Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta. Together they drive an outsized share of the S&P 500’s returns. That is efficient when leadership is narrow—but fragile when it shifts suddenly.

We recently compared two different Exchange Traded Funds (ETFs) which own the same 500 companies: SPY, the cap-weighted S&P 500, and RSP, the equal-weighted version. We then expanded these offerings to include their Canadian cousins: XSP (S&P 500, CAD-hedged), EQL (equal weight, CAD-hedged), and XMU (U.S. minimum volatility, CAD-hedged). They all hold the same market but behave like very different portfolios. The distinction looks subtle on paper – but it’s meaningful in practice

Cap-weight (SPY / XSP) ETFS are the index investments most people own, even if they do not realize it. In this investment, larger capitalized companies receive heavier weightings. It is simple, efficient, and when the same handful of mega-caps lead, very rewarding. But when those leaders stumble, what felt like diversification turns out to be concentration risk in disguise.

In contrast, equal-weight (RSP / EQL) takes the same 500 companies and gives each the same allocation. It cuts concentration risk, leans a little more toward mid-caps, and – because the fund rebalances quarterly – enforces discipline automatically. It trims the more expensive names and increases its cheaper holdings, a built-in reversion mechanism most investors talk about but rarely follow.

Minimum volatility (XMU) is the quiet achiever of the group. While it owns U.S. stocks, preference is given to companies with steadier earnings, lower volatility, and defensive sector tilts. It rarely leads in narrow, speculative rallies – but it cushions the fall when markets turn. And in compounding, avoiding deep holes matters more than sprinting to the next peak.

When index leadership narrows, SPY/XSP tends to win the sprint. That has been the story from 2023 through 2025 – a few giants carrying the tape. But the same structure that helps in a narrow rally becomes a drag when cycles rotate. Equal-weight tends to shine in those transitions (think 2000–2003, parts of 2008–2010, and again in 2022) – not because it predicts the turn, but because it never over bets a single theme.

Over long horizons, we have found that the total returns between cap-weight and equal-weight are similar, but their respective paths are not. Equal-weight indexes usually bring the following benefits: smaller single-name risks, less whipsaw from one sector and recoveries that do not depend on the “usual suspect” stocks finding their footing. That’s the kind of structure that helps investors stay invested — and behaviour, more than stock-picking, is what drives long-term results.

For Canadian investors, currency is not background noise. XSP and EQL add a CAD hedge on top of the underlying exposures. That hedge cuts out USD/CAD moves – helpful when the Canadian dollar is weak and you don’t want currency driving your returns, but less helpful when the U.S. dollar provides a natural shock absorber. There is no perfect answer here, only alignment: your hedge decision should match where you spend, not where you invest. If your spending is in Canadian dollars and you lose sleep over currency swings, hedging has merit. If you prefer global diversification that includes currency, unhedged funds like SPY/RSP offer a better option.

So where does XMU fit? Minimum-vol strategies typically provide lower drawdowns and tighter dispersion of outcomes, at the cost of lagging in speculative surges. For investors who value staying power over storylines, a sleeve of XMU has proven its worth – especially in years like 2022, when both stocks and bonds fell in tandem.

Which strategy is right? Well, there is no single clear-cut winner. The edge comes from balance. A resilient way to own U.S. equities is to keep a cap-weighted core for efficiency (SPY or XSP), add an equal-weight sleeve for diversification by design (RSP or EQL), and use a min-vol sleeve (XMU) as a shock absorber. Then rebalance. The discipline of the process matters more than the precision of the forecast.

Costs differ. SPY/XSP are the cheapest, while equal-weight and min-vol cost a bit more. But those extra basis points tend to earn their keep during regime shifts. The key is to pay for structure, not story.

Two final points that never appear in a factsheet. First, sector drift: cap-weight follows leadership wherever it goes – today that is in tech-adjacent growth. Equal-weight quietly pulls investors back toward the middle: more industrials, financials, healthcare, less “top five or bust.” Second, behavioural fit: the best portfolio isn’t the smartest – it is the one you can hold through a full cycle.

Investing is less about prediction and more about process. The question is not whether SPY outperforms RSP this quarter or whether the loonie gains against the US dollar. The question is whether your structure allows you to compound through leadership changes without needing to anticipate them in advance.

If there's one lesson from this work, it is this: balance is an edge. Cap-weight captures the market as it is. Equal-weight avoids overpaying for what has already happened. Minimum-vol provides stability when others are reacting. Blend them thoughtfully, keep your currency policy intentional, and let the rebalancing do its quiet, compounding work.

If you’d like to explore how this balance could fit into your portfolio, you can reach us here. Sometimes a short conversation adds more clarity than another headline.