An ETF’s name tells you very little. What matters is the index it follows: which investments get in, and how much of each. This module teaches you to read that recipe.
An index is a rule-based list of investments, published by an index company. The rules say what qualifies (for example, large US companies), how many to include, and how much weight each one gets. An index ETF follows the recipe and holds what the list says.
Common broad indexes you will meet:
Most broad indexes are market-cap weighted. A company’s weight equals its market value divided by the total market value of everything in the index. Bigger company, bigger slice.
Example. A tiny index has three companies worth $600 billion, $300 billion and $100 billion. The total is $1,000 billion. Their weights are 60%, 30% and 10%. Put $1,000 into a fund that follows it and $600 goes to the largest company.
The advantage is that it needs very little trading: as a company grows, its weight grows by itself. The trade-off is concentration. When a handful of companies become enormous, they can make up a large share of a fund that looks diversified on paper. In recent years the ten largest companies have accounted for roughly a third of the S&P 500.
An equal-weight index gives every company the same share. In a 500-stock equal-weight fund, each company starts at 0.2%, whether it is the largest or the smallest.
| Market-cap weight | Equal weight | |
|---|---|---|
| Largest companies | Big slices | Same slice as everyone |
| Trading inside the fund | Very little | Regular rebalancing |
| Typical fee | Lowest | Somewhat higher |
| Tilts toward | Giants | Mid-sized and smaller companies |
Neither is “right”. They are different bets. You will also see indexes built around dividends, low volatility, or a single sector. The further a recipe moves from the whole market, the more it behaves like a specific bet and the less like a core holding.
Every ETF has a fact sheet or product page on the provider’s website. Check five things:
Educational purposes only; not financial advice. Any funds, tickers and figures are illustrative examples, not recommendations. Fees, tax rules and contribution limits change, so confirm current details with the fund provider and your tax authority. Worked examples use constant returns and are not forecasts. Written by Elizabeta Dimoska. Always do your own research and consult a licensed advisor.