Concerns about the degree of concentration in cap-weighted indices like the S&P 500® seem to arise whenever performance is dominated by mega-cap names—as it has recently been. A simple way to measure market concentration is to add up the weight of the largest constituents in an index.
Interestingly, after peaks in concentration—such as the aftermath of the technology bubble—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 (HHI) 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.
You can now read the full whitepaper at the link below