Bipan Rai explains how shifts in market cap weights and index rules mean advisors need to watch index providers more closely
Each month at WP, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on ETFs.
Bipan Rai is watching how interest in ETFs and indexes has started to shift. Rai is the Managing Director and Head of ETF and Alternatives Strategy at BMO Global Asset Management. He has watched as strong returns from specific companies and sectors have driven up broader market index funds. He has also seen a growing reticence around some of those indices’ concentration in big names tied to tech and AI, with investors exploring equal weight strategies as an alternative.
Rai’s view is that while passively managed index strategies may seem more low-touch, the choice to invest in them remains an active one. He outlined how different cap weighting approaches to indices, as well as different and changing inclusion rules by index providers, are making the index investing space more nuanced, mandating closer attention by advisors.
“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.
Rai says that the story of SpaceX may represent something of a turning point for certain indices, as they move to reflect the reality that businesses can stay private for far longer than they once could. Companies like OpenAI or Anthropic, which are still private, may prepare for IPOs at massive valuations. Advisors, he says, need to watch for whether these looming large IPOs will see further index rule revisions, which could alter the way indexes perform. Rai notes that these rule revisions may simply be how index providers strive to reflect reality, saying that it’s hard for a US large-cap index to ignore a company with a market cap like SpaceX. The impact of the SpaceX IPO and the looming IPOs of the major AI names represent, in Rai’s view, “uncharted territory” for the world of index investing.
For advisors looking at a host of active choices within the passive investable universe, Rai says there needs to be an understanding of the nuances and complexities in these tools. Advisors, he says, need to become educators to make sure their clients really know what they’re buying.
“Index investing and passive investing is changing. It's evolving because of the size of these companies that are that are thinking about going public. You can't just set it and forget it anymore. You have to be very intentional and you have to understand what's changing at the more granular level,” Rai says. “I think the onus is really on advisors to educate themselves and educate their clients as well in terms of how these indexes are changing, how some rules might be changed a little bit… It's really incumbent on everyone to do their homework. I wish I could say that there was a simplified way that advisors can look at this and maybe not need to go down the rabbit hole as much as they would like to, but I would encourage everyone to go down the rabbit hole and really understand what's going on here.”
