Cap-Weighted Index

A capitalization-weighted (cap-weighted) index weights each constituent stock by its market capitalization relative to the total market cap of all stocks in the index. This is the most common index methodology, used by the S&P 500, Nasdaq-100, Russell indexes, and most global benchmarks.

How Cap-Weighting Works: If Company A has a $3 trillion market cap and the total index market cap is $45 trillion, Company A's weight = $3T / $45T = 6.67%.

Current S&P 500 Concentration (approximate):

Company	Weight
Apple	~7%
Microsoft	~7%
NVIDIA	~6%
Amazon	~4%
Alphabet	~4%
Meta	~2.5%
Top 10 total	~35%

Advantages:

1. Self-rebalancing — weights adjust automatically as prices change
2. Low turnover — minimal trading needed, very tax-efficient
3. Low cost — expense ratios as low as 0.03%
4. Market consensus — reflects collective market opinion on company values
5. High liquidity — largest weights are the most liquid stocks
6. Industry standard — most benchmarks are cap-weighted

Disadvantages:

1. Concentration risk — a few mega-caps dominate the index
2. Momentum bias — overweights stocks that have already risen
3. Bubble risk — adds more weight to overvalued stocks as they inflate
4. Sector skew — technology currently dominates most cap-weighted indexes

Alternatives to Cap-Weighting:

• Equal-weight — same weight for every stock
• Fundamental-weight — weighted by revenue, earnings, dividends
• Smart beta — factor-based weighting (value, quality, momentum)
• Price-weight — weighted by stock price (Dow Jones)