Amid market shifts, rule changes passive ETFs are becoming more active

“People think ‘active,’ and they think ‘making decisions.’ They hear ‘passive’ and sometimes people think they’re not making any decisions. But if you’re looking at a cap-weighted index, that’s a very specific decision,” Rai says. “An index is not neutral. Every index has within it some embedded bets… Anytime you’re looking at an index, you really have to be aware of what you’re looking at in your own inherent biases. I think that’s, that’s something important because it does accentuate the risks of index investing for a lot of advisors.”

The market cap/equal weight debate

Rai says that he’s seeing a growing interest in equal weight index strategies now, even as investors and advisors continue to buy up cap-weighted ETFs. Some of that interest is being pushed by a fear of concentration risk on certain indices. The S&P 500, for example, now holds a 37.9 per cent weight in Information Technology stocks and nine of the ten largest companies on the index by market cap are technology names, including all of the so-called ‘magnificent seven.’ Given the role of the AI narrative in the performance of those stocks over the past four years, some investors are wary that the supposed diversification they would get from a cap-weighted S&P 500 ETF amounts to an outsized bet on AI.

While Rai hears some concerns from advisors about this concentration, he puts it in the context of a US market that is still the most diversified in the world. He notes that certain other global equity markets, such as Taiwan, and South Korea, are far more concentrated. There is still strong interest in traditional cap-weighted US market indices.

Equal weight strategies are pulling interest as well. In 2026, so far, the S&P 500 equal weight index has slightly outperformed its market cap weighted equivalent. Rai says that this outperformance is somewhat nascent, but it’s enough to attract greater interest from investors. His view is that equal weight strategies imply a small to mid-cap tilt and an anti-momentum bias. They can benefit when market performance broadens out from its leadership, but can miss out on winners when they start to emerge. As a result he tends to see them as a useful tactical play in specific market moments, rather than a long-term strategic allocation.

How rule changes might shift indexes

The recent SpaceX IPO raised another area of nuance around indices that advisors now must consider. The company went public at a market capitalization of over $2 trillion USD, and immediately became one of the world’s largest companies by market capitalization. However, before the IPO certain indices, such as the Nasdaq 100, controversially revised their rules to allow the company’s inclusion. Previously, a company would not be included in these major indices until it had been traded publicly for a longer period of time. The S&P 500, notably, maintained its rule requiring 12 months of public trading and four consecutive profitable quarters before inclusion in the index.