An index is a rule for building a portfolio, and the weighting rule is the most consequential part of it. Two indices covering identical companies can behave quite differently.
Market value weighting follows the market
The most common approach sizes each holding by the company's market value, so the largest companies occupy the largest positions.
This has a practical advantage. Weights adjust automatically as prices move, so the index needs little trading to stay aligned with its rule.
It also means the index reflects the aggregate position of all investors, which is why it serves as a reasonable description of what the market as a whole holds.
Concentration is a consequence, not a flaw
When a small number of companies grow much faster than the rest, market value weighting increases their share of the index automatically.
A broad index can therefore end up with a large portion of its value in a handful of names, which surprises investors who assumed breadth from the number of holdings.
The exposure is doing exactly what the rule specifies. Whether that concentration is acceptable is a separate question from whether the index is working.
Some indices cap individual weights to address this, which improves diversification but requires periodic trading to enforce and causes the index to depart from the market it describes.
Equal weighting changes the exposure entirely
An equally weighted version of the same list gives each company the same allocation regardless of size, which tilts the portfolio toward smaller members.
Because prices move constantly, the weights drift and must be reset periodically. That rebalancing generates trading costs a market value index avoids.
The resulting return stream differs enough that the two versions can diverge for years, despite holding the same companies.
Alternative rules select on other characteristics
Some indices weight by dividends, revenue or measures of volatility, each producing a systematic tilt away from what the market holds.
These rules are transparent and mechanical, which distinguishes them from discretionary management, but they are still active decisions about what to own more of.
Comparing such an index to a market value benchmark measures the effect of that decision rather than the skill of any manager.
The rule also governs entry and exit
Weighting interacts with inclusion criteria, since a company must first qualify and then be sized. Both steps are defined in the methodology document.
Because tracking funds must follow, changes to membership force real trading at defined times, which is a cost borne by the fund's investors.
Reading the methodology is therefore the only reliable way to know what a tracking fund will hold, since the name of the index rarely conveys it.