Index investing is a mainstay of Australian portfolios, but most people don’t look beyond the familiar ASX200 or S&P/ASX 300—indexes that are weighted by market capitalisation. Enter the unweighted index: a lesser-known but increasingly popular alternative in 2025 as investors look for diversification and risk management in a rapidly shifting market.
What Is an Unweighted Index?
An unweighted (or equally weighted) index is constructed by giving each constituent stock the same importance, regardless of its market value. In contrast to a market-cap weighted index—where giants like BHP or Commonwealth Bank dominate—an unweighted index treats a small-cap mining explorer and a big-four bank exactly the same.
For example, if the ASX200 was unweighted, every company in the index would contribute 0.5% to its performance, instead of the largest companies driving most of the returns. The index is rebalanced periodically (often quarterly or annually) to maintain equal weights.
Why Are Unweighted Indexes Gaining Traction in 2025?
Several factors are driving renewed interest in unweighted indexes among Australian investors this year:
- Market Concentration Risks: The ASX remains heavily concentrated in financials and resources. As of 2025, the top 10 stocks still make up over 45% of the S&P/ASX 200’s value. Unweighted indexes dilute this concentration, offering broader exposure.
- Recent Performance: Over the last five years, several equally weighted global indexes have outperformed their cap-weighted peers, especially in periods where smaller companies rebounded or sector leadership rotated.
- Superannuation Innovation: Some Australian super funds are now offering unweighted index options, responding to member demand for better diversification and lower single-stock risk.
With ongoing economic uncertainty and regulatory scrutiny on fund performance, unweighted indexes appeal to those seeking a more balanced approach.
Pros and Cons for Australian Investors
Like any investment strategy, unweighted indexes have their strengths and drawbacks:
- Pros:
- Broader Diversification: No single stock or sector dominates returns, which can smooth out performance volatility.
- Potential for Higher Returns: When smaller or mid-cap stocks rally, unweighted indexes can outperform, as these companies carry more weight compared to a cap-weighted index.
- Reduces Concentration Risk: Particularly relevant in Australia, where a handful of stocks drive the ASX’s performance.
- Cons:
- Higher Turnover: Keeping weights equal requires more frequent rebalancing, which can increase trading costs and, in a managed fund, may slightly increase fees.
- Lower Performance in Mega-Cap Rallies: If big companies are booming, an unweighted index will lag behind a cap-weighted index.
- Liquidity Considerations: Equal weighting may force the index (or a fund tracking it) to hold more of the less-liquid, smaller companies, potentially impacting execution.
For example, in 2024, the S&P/ASX 200 Equal Weight Index slightly outperformed the standard S&P/ASX 200 due to strong performance from mid-cap tech and healthcare companies, while the big banks lagged.
How to Invest in Unweighted Indexes in Australia
Australian investors can now access unweighted indexes through a handful of ETFs, such as the BetaShares Australian Equal Weight ETF (QOZ) and some global equal-weighted products. Several superannuation funds and robo-advisers are also rolling out unweighted index options as of 2025.
When considering these products, check:
- Management fees (they may be slightly higher than standard index ETFs)
- Rebalancing frequency
- Sector and stock exposure versus a traditional cap-weighted index
It’s also worth noting that ASIC and the ATO have both issued updated guidance in 2025 on index fund disclosure and transparency, requiring clearer communication of how unweighted indexes operate and their risk profiles.
