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What is market-value weighting and why does it matter?

When investing through index funds, the investments are usually weighted according to their market value, although this may also be done equally. It's important to understand what this means before you invest.

Investment funds are a popular way to try and grow your wealth.

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In a fund, your wealth is pooled alongside other investors and placed in the same assets. If the fund grows by 4%, you’ll usually see 4% growth on your wealth (after charges). The same is also true if the fund performs poorly.

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The main two types of approach with funds are active or passive management.

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Active - a fund manager picks investments based on research and attempts to generate market-beating returns.
Passive -the fund follows the performance of a benchmark index, trying to replicate the return of the market as closely as possible. Passively-managed funds are sometimes referred to as ‘index’ or ‘tracker’ funds.

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When investing in index funds, it’s important to understand whether the investments are chosen (or ‘weighted’) in line with their market value, or if this is done equally.

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Market-value vs. equal weighting

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With an active fund, managers choose investments in line with the asset class or investment style that the fund pursues. Managers can buy these investments in varying quantities, with the goal of beating the average market return.

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Passively managed funds face a different playing field as they’re constrained by the investments listed on the index.

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That said, there are two different approaches these funds can take when deciding how much of each investment they should hold:

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market-value weighting, holding each investment in line with its market value; or
equal weighting, holding the same value (or ‘weight’) of each investment.

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Market-value weighting

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In a market-value weighted fund, the size of each investment is in line with its overall market value.

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Imagine an index where the largest company, A, is 1,000 times larger in terms of market capitalisation than the smallest company, Z. In that case, in a market-valued weighted fund, you’d expect to see the investment in A be 1,000 times that of Z.

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This helps the fund better represent the market as a whole. However, it also means that the fund’s performance could depend on a small number of companies, a single country or region, or an industry or sector, perhaps concentrated in a single part of the market.

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The FTSE 100 is a good example of a market-value weighted index. It tracks the performances of the top 100 companies in the UK by market capitalisation. In a FTSE 100 fund, the value held of each company is usually determined by its market value.

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Pros and cons of market-value weighting

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Pros and Cons Table

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Pros	Cons
Good market representation - in theory, a value-weighted fund will represent the movements of the market, as the best-performing companies should be the most valuable. This can allow investors to benefit from broader market dynamics.	Potentially less diversified - it’s generally considered sensible to diversify your investments - that is, choosing a range of different investments in different industries and parts of the world. Value-weighted funds could end up less diversified if the majority of it is held in bigger companies. While investors can benefit from growth if these perform well, it can also be a downside if they don’t.
Typically lower cost - as bigger companies are more popular with investors, their shares are often traded more easily. This reduces costs for the fund provider, making it cheaper for investors.	Lower investment in smaller companies - similarly to diversification, if smaller companies outperform the bigger ones, value-weighted funds will generally not benefit as much from that growth.

Pros

Cons

Good market representation - in theory, a value-weighted fund will represent the movements of the market, as the best-performing companies should be the most valuable. This can allow investors to benefit from broader market dynamics.

Potentially less diversified - it’s generally considered sensible to diversify your investments - that is, choosing a range of different investments in different industries and parts of the world. Value-weighted funds could end up less diversified if the majority of it is held in bigger companies. While investors can benefit from growth if these perform well, it can also be a downside if they don’t.

Typically lower cost - as bigger companies are more popular with investors, their shares are often traded more easily. This reduces costs for the fund provider, making it cheaper for investors.

Lower investment in smaller companies - similarly to diversification, if smaller companies outperform the bigger ones, value-weighted funds will generally not benefit as much from that growth.

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Equal weighting

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When a fund uses equal weighting, this means it holds each company to the same value, despite their differing sizes.

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As an illustration, imagine that company A’s shares trade for £200, while company B’s shares are £40.

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To equally weight them, the fund will invest in the number of shares that mean each company is represented by the same value in the fund.

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In this case, you’d expect to see five shares in B per share in A.

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These investments will naturally shift in value over time. So, the fund manager will usually rebalance the fund - typically quarterly - to make sure that values remain equally weighted (or as close to as possible).

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Equal-weighted indices (and thus funds) are rare, with the most prominent tending to be equally weighted variants of a major index.

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For example, there is a separate FTSE 100 Equally Weight Index. This index has the same companies as listed on the S&P 500, but maintains the same exposure of 1% to each.

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Pros and cons of equal weighting

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Pros	Cons
Potentially greater diversification - Investors place more money in small and mid-cap companies, which can offer greater diversification.	Greater chance of volatility - Smaller companies are more likely to move up and down in value, increasing the likelihood of volatility in investors’ holdings with equally-weighted funds.
Reduces dependence on market leaders - Investors are less likely to be overweight in high-performing sectors that dominate an index.	Higher transaction costs - Because funds need rebalancing to keep weightings equal over time, investors may face higher transaction costs for fund management.

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Invest in funds through PensionBee

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Our pension plans offer you a range of funds to invest in.

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That includes our 4Plus Plan, an actively managed fund that aims to achieve long-term growth of 4% a year above the Bank of England rate.

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Or, you could choose our Tracker Plan that invests your money in a range of global shares and bonds. Following five key benchmarks, the fund is weighted by market value and aims to follow the world’s markets as they move.

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Find out more about our range of plans on the PensionBee website.

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Risk warning

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As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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Last edited: 06-02-2026