What are Capitalization-Weighted Index Funds?

What Are Capitalization-Weighted Index Funds?

By Catherine Brock – Updated Jun 14, 2025 at 10:59 PM

Key Points

Cap-weighted funds focus on large companies, impacting fund performance and risk.
These funds often feature lower expense ratios due to minimal trading requirements.
Consider your investment strategy when choosing between cap-weighted or equal-weighted funds.

Capitalization-weighted index funds are common, but do they fit your investment strategy? This guide can help answer that question. Let's explore the concept of weighting by market capitalization and how it affects the risk and performance of a fund.

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A person using a calculator with financial charts on the desk. — Image source: Getty Images.

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Table data source: Vanguard.com, SSGA.com, ishares.com.
Fund metrics and data	SPDR S&P 500 ETF Trust (NYSEMKT:SPY)	Vanguard Growth ETF (NYSEMKT:VUG)	iShares Russell 1000 ETF (NYSEMKT:IWB)
Net assets	$544 billion	$220 billion	$36 billion
Benchmark index	S&P 500	CSRP U.S. Large Cap Growth Index	Russell 1000
Number of holdings	503	200	1,005
10-year average annual return	12.56%	14.89%	12.53%
Microsoft weighting	7.18%	12.53%	6.64%
Apple weighting	6.78%	10.81%	6.28%
Nvidia weighting	6.78%	8.86%	6.02%

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Table data source: Spglobal.com.
Timeframe	S&P 500 (Cap-Weighted)	S&P 500 Equal Weight Index
1-year return	26.27%	13.81%
3-year return	10.26%	4.58%
5-year return	15.33%	11.34%
10-year return	12.94%	10.22%

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As you can see, weighting by market capitalization in the S&P 500 has been the superior strategy for the past decade. In the last three years specifically, the cap-weighted index more than doubled the returns of its equal-weighted counterpart.

Those outsized returns come primarily from extreme growth in a small group of very large technology companies. These stocks and their approximate average annual growth since June of 2021 are:

Microsoft: 25%
Apple: 24%
Nvidia: 232%
Alphabet (GOOG -2.57%): 15%
Meta (META -0.24%): 17%

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As long as these largest companies keep delivering the biggest gains, cap-weighting will outperform. If that trend changes and these heavyweights slow down, their sluggish performance could mask gains from the portfolio's smaller players.

So, is cap-weighting right for you? If you prefer to let a rising stock run, the answer may be yes. If you'd rather exit your winners and take profits before things go south, an equal weighting strategy could be the better fit.

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About the Author

Catherine grew up in Southern California wearing a lot of black and trying to perfect the art of sarcasm. Prior to joining The Fool as a contract writer, Catherine was climbing the corporate ladder in marketing roles and dabbling in too many side hustles. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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@catherinejbrock

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, and Vanguard Index Funds - Vanguard Growth ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.