Equal Weight’s Edge In Concentrated Busts

Periods following major S&P 500 (SPX) peaks have repeatedly highlighted how index construction alters drawdown behavior. During the dot‑com bust from the 2000 peak through the 2002 trough, the S&P 500 (SPX) Equal Weight Index significantly outperformed the traditional cap‑weighted S&P 500 (SPX), with cumulative relative performance in the roughly 25-35 percentage point range.

That gap reflected the heavy concentration of losses in the largest technology and growth leaders that dominated the cap‑weighted benchmark, while smaller and less‑hyped S&P 500 constituents experienced shallower declines or relative resilience. Equal‑weight structures like the S&P 500 Equal Weight Index, and ETFs such as Invesco S&P 500 Equal Weight ETF (RSP), systematically allocate less to those mega‑cap names and more to the rest of the index.

In contrast, during the Global Financial Crisis, equal‑weight exposure behaved differently. Equal‑weight fell slightly more than cap‑weight into the 2008-2009 trough, as its greater tilt toward mid-cap and cyclical sectors amplified downside when macro stress hit the entire market rather than just prior leaders.

Subsequent years after both busts showed that much of equal‑weight’s advantage accrues in the recovery and rotation phase. Following the dot‑com unwind, equal‑weight outperformance versus cap‑weight persisted for about three years, while after the financial crisis, relative strength was concentrated in the 2-3 years after the 2009 bottom.

These episodes underscore that products tracking the cap‑weighted S&P 500, such as SPDR S&P 500 ETF Trust (SPY) and iShares Core S&P 500 ETF (IVV), are most vulnerable when pre‑correction gains are driven by a narrow set of mega‑caps. In environments where drawdowns are concentrated in those leaders, equal‑weight vehicles like RSP and related variants such as RSPT have historically seen smaller relative damage and, in some windows, material positive spread versus cap‑weighted peers.