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Concentration within Sectors and Its Implication for Equal Weighting

November 11, 2022 | S&P Dow Jones Indices

Concerns about the degree of concentration in cap-weighted indices like the S&P 500 seem to arise whenever performance is dominated by mega caps. After peaks in concentration, the S&P 500 Equal Weight Index has typically outperformed its cap-weighted counterpart. In this paper, we propose an alternative way to measure concentration. By adjusting the Herfindahl-Hirschman Index to account for the number of names in a sector, we’re able to make meaningful cross-sector comparisons. We show that concentration tends to mean-revert in most sectors, which has important implications for the relative performance of equal weighting.

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