If you own an S&P 500 index fund, you are investing in an index that’s weighted by market capitalization. A “cap-weighted” index is tied heavily to the stocks that have been the top performers because the value of their outstanding shares is much greater. Today, stocks such as GE, Wal-Mart, and Microsoft have several times the impact of the smallest 25 stocks in the S&P 500.
An alternative approach is to invest in an equal-weighted index. Each of the 500 stocks in the S&P 500 gets the same weighting, from GE and Microsoft down to number 500. From 1958 through 2006, the equal-weighted S&P 500 index beat the cap-weighted S&P 500 index in compound return, 10.9 percent to 7.6 percent (both numbers exclude dividends.)
An equal-weighted index tends to have more of a value bias while cap-weighted indexes are growth-oriented. If you would like to include an equal-weighted index fund in your portfolio, you can use Rydex SP Equal Weight, an exchange-traded fund with the ticker symbol RSP.