Market-cap weighting

A rule that sets each holding's share of a fund in proportion to the market value of the company, so the largest company receives the largest allocation.

Example

In a fund weighted this way the single largest of 500 holdings can be 7.2% of assets while the smallest 250 are 4.9% between them.

Important

It allocates most of the money to whatever has already risen, and the same property is why such funds rarely need to trade - a large part of their cost advantage. Both halves are true, and it is a choice rather than a neutral default.

Related terms

• Market capitalisation — The last traded share price multiplied by the total number of shares outstanding - the market's headline figure for the value of a company's equity.
• Index fund — A fund built to track a market index, such as a broad stock index, rather than to beat it.
• Look-through — Reading a fund's actual holdings and their weights, rather than its name or category, to establish what exposure you hold.
• Equal weighting — Giving every position in a portfolio the same size, expressing no view about which is more attractive than which.

Lessons that explain it

• Appraising one fund: the holdings file, the rules, and the gap to the index — Seven checks, in order of how much they change what you own. The two everybody runs - the name and the expense ratio - are the two cheapest, and the one nobody runs is where the exposure lives. (14 min)
• What a fund does that nothing else does, and what having it costs you — It converts a sum too small to spread into a spread sum, in one transaction. In exchange you buy every holding at somebody else's weights, including the ones you would never pick. (10 min)

All 578 terms in the Investing glossary