• Most major equity indexes currently—including the S&P 500 and MSCI World—use a free-float, market-capitalisation-weighted methodology, which assigns weights based on the total value of each stock’s publicly available shares.
• Price-weighted indexes such as the Dow Jones Industrial Average are not considered to be reliable benchmarks as higher-priced stocks—regardless of company size—have an outsized impact on the index risk and return.
• Understanding index construction methodology matters for investors looking to get exposure to a specific benchmark, because the same set of stocks can produce meaningfully different risk and return profiles depending on how they are weighted.

Equity indexes combine exposure to a basket of stocks, each with its own weight. However, index providers can select different methodologies, each one having a direct impact on the weights that a single stock is assigned. Two indexes tracking the same market may deliver different returns, carry different sector tilts, and respond differently to market events — simply because of...