a sector equal weight approach proves defensive - again

17/3/2026

A bar chart titled 'World Equity Indices: Traditional vs Sector Equal Weight' showing annual performance from 2021 to 2026 Year-to-Date. It compares the Traditional World Equity Index (dark blue) to the Elston World Equity Sector Equal Weight Index (light blue). Notably, in the 2022 downturn, the traditional index fell 8.4% while the equal-weight index fell only 0.7%. In 2026 YTD, the traditional index is down 0.5% while the equal-weight index is up 4.4%.

by Henry Cobbe CFA, Head of Research, Elston Consulting

When we read the financial news, much of the commentary is around what is impacting different sectors. A commodities rally is good for Materials sector. Higher interest rates are bad for the Real Estate sector. Consumer Staples fare better during recessions. Rising oil prices is positive for the Energy sector. And of course valuations being stretched in the Technology sector. And so on. Yet when it comes to asset allocation, financial advisers and discretionary investment managers are anchored into countries/regions and try to get a look-through sector perspective as an afterthought. This is paradoxical.

Defensive Investing: How Sector Equal Weighting Outperforms in 2026

A bit about Sectors

There are eleven sectors in MSCI’s Global Industry Classification Standards, and their full list is here. For UK investors looking at London-listed ETFs, there is the full choice of World Equity Sector ETFs to choose from, thanks to mainstream providers such as State Street’s SPDR® sector ETF range and DWS’ Xtrackers.

Sector concentrations in a traditional World Equity Index

For a traditional (market-capitalisation weighted) world equity index such as MSCI World the methodology rewards the companies with the highest market valuations. As the technology sector has aggregated a greater share of global corporate earnings and its growth rate means it trades on a higher earnings multiple. As a result, the growing concentration of technology sector in market-cap weighted indices is well documented.

The largest three sectors of MSCI World (as per latest (end Feb-26) index factsheet) are Information Technology at 25.09%, Financials at 16.40% and Industrials at 12.33%. The smallest three sectors allocation are Materials 3.78%, Utilities 2.83% and Real Estate 1.84%.

Concentration risk is a choice not an obligation

We see concentration risk as a choice, not an obligation. If investors are concerned about the concentration of US Technology companies in the S&P 500, then consider the S&P 500 Equal Weight Index (which allocates 1/500th or 0.2% to each company in the index).

Similarly, (as we outlined in our 2024 research insight) if investors are concerned about sector concentration risk in a traditional world equity index, then consider the Elston World Equity Sector Equal Weight Index (which allocates 1/11th or 9.09% to each sector (via a representative ETF). This approach “levels the playing field,” so that the each sector has the same weight, in this alternatively constructed index.

About the index

The Elston World Equity Sector Equal Weight index is constructed by allocating equally to a basket of London-listed World Equity Sector ETFs. The basket is rebalanced to those strategic weights quarterly. Designed for UK investors, the index is priced in GBP.

What are the advantages of a Sector Equal Weight approach?

This Sector Equal Weight approach means that the types of companies in the index are more broadly distributed.

Interestingly, in energy shock years such as 2022 and thus far in 2026, a Sector Equal Weight approach proves more defensive: probably because of the higher weights for Energy and Materials in a Sector Equal Weight approach, compared to a traditional market-cap weighted index.

What are the disadvantages of a Sector Equal Weight approach?

The main disadvantage is the lack of familiarity. Despite there being no shortage of academic and industry literature on sector-based investing, we were unaware of any Sector Equal Weight index, which is why we launched the Elston World Equity Sector Equal Weight Index (ticker: ELSWES). Data is available on Bloomberg, Financial Express, Morningstar and all major data vendors.

Potential applications of the Elston World Equity Sector Equal Weight Index

We outlined three potential applications of the Elston World Equity Sector Equal Weight Index below:

Portfolio Performance evaluation: This is the appropriate index for any investors or investment managers looking to evaluate the value add of their decision-making as regards sector-specific overweights and underweights. Whilst sector-rotation investing is popular in the US, we expect it to become more popular in the UK. The higher dispersion between sectors (relative to countries) means that there’s greater potential for generating alpha through sector selection as we outlined in our January 2023 research insight.
Active funds: This index is used as a benchmark for the innovative WS Sequel World Equity Fund which has an active sector allocation approach managed by State Street Investment Management.
Index funds: This index could be used as a benchmark for a Sector Equal Weight index-tracking fund, but as with any fund launch would require sufficient scale to be cost-efficient.

Summary

An essential part of portfolio risk analytics for financial advisers is understanding the inherent biases within a multi-asset portfolio including the sector positioning of an equity allocation. This enables advisers’ investment committees to then consider whether they wish to include certain sector-specific allocations.

For UK advisers, please contact us if you would like to find out more about how we can help

Asset Allocation Research for UK Advisers