BY WEALTH ADVISER
For many Australian investors, broad index funds and familiar blue‑chip shares form the backbone of their portfolios. These investments are popular because they are relatively low cost, easy to understand and provide instant exposure to a wide range of local companies. Yet the Australian sharemarket has some quirks that can surprise people, especially when they discover how much of their money is effectively tied to a small group of banks and miners.
Writers such as Jamie Wickham and Martin Conlon have pointed out that these quirks do not make index funds “good” or “bad” – they simply shape how risks and returns show up over time. Understanding how the market is put together, and how ideas like equal‑weighting and factor investing work, can help everyday investors make sense of the choices available to them and have more informed conversations when they seek personal advice.
How the Australian sharemarket is put together
The main Australian share index, the S&P/ASX 200, is built using market values: the larger a company is on the stock exchange, the bigger its slice of the index. Because Australia has a particularly large banking and resources sector, this leads to a market where financials and materials – mainly the major banks and big miners – take up a large share of the total. At times, a relatively small handful of companies has made up a very large part of the index.
For an investor who owns a fund that tracks this index, this means a significant portion of their Australian share exposure is really driven by how those big companies perform. That can be very helpful when those sectors are doing well, but it also means the portfolio is more exposed if they go through a difficult patch. Other parts of the economy, such as healthcare, technology or some industrial businesses, may play a much smaller role in the index even though they are important employers and service providers. Recognising this structure can make it easier to understand why a portfolio might sometimes feel more “bank‑and‑miner‑heavy” than expected.
What equal‑weighting and sector balance mean
Some commentators, including Wickham, have explored what happens if the weight of different sectors is spread more evenly. Instead of allowing the largest sectors to dominate, this approach gives similar weight to each of the main industry groups, such as financials, materials, healthcare, consumer companies, industrials and so on. Over time, the portfolio is rebalanced so that no single sector becomes too large or too small relative to the others.
An equal‑weight or sector‑balanced structure is simply another way of organising a share portfolio. It does not need to replace a traditional index; many investors use both concepts together. The key idea is that giving more space to smaller sectors can increase diversification. For instance, Conlon has highlighted how areas like healthcare and certain “real‑economy” businesses have faced challenges and weaker sentiment in recent years, leaving their share prices more subdued. A structure that naturally keeps some allocation to these areas means the portfolio may benefit if conditions improve, without needing to make big, one‑off bets. As with any approach, there will be periods when this kind of balance helps and periods when it lags.
Value and size: two long‑running themes in markets
Another set of ideas that often appears in discussions about portfolio design is “factor investing”. Factors are broad characteristics that have tended to influence share returns over long periods. Two of the best‑known are value and size.
The value factor is linked to shares that trade on lower prices relative to measures such as earnings, assets or cash flow. Historically, groups of cheaper shares have often, though not always, delivered higher long‑term returns than more expensive ones, in part because expectations are lower and there is more room for positive surprise. The size factor relates to smaller companies, which over some long stretches have grown faster than their larger peers, although they can also be more volatile. Research looking at Australian shares has examined how these patterns have shown up locally and how they can be captured in diversified, rules‑based funds.
For a retail investor, the practical message is not that value or small‑company strategies are “better” than broad index exposure. Rather, they represent additional options. Some funds blend these factors into their process, others track broad market indexes. Each approach has its own risk and return profile, and each will move in and out of favour over time.
Why structure and regular rebalancing matter
A theme running through the work of both Wickham and Conlon is the importance of having a structure and sticking to it. Markets are full of stories – about technology breakthroughs, commodity booms, housing cycles and, more recently, artificial intelligence. It is easy to feel pressure to react to every new headline.
A structured approach starts with a clear view of how much to hold in different assets and sectors, and how much risk feels comfortable. Within that, some investors choose a simple broad index fund; others mix in sector‑balanced or factor‑based strategies. Whatever the mix, having a plan for how often to review and adjust the portfolio can help keep it on track. Rebalancing – bringing holdings back towards their intended proportions after markets move – is one example. This may mean trimming investments that have grown large and adding to those that have become relatively small. Over time, this can help maintain diversification and can gently encourage a “buy‑low, trim‑high” pattern of behaviour without needing to guess where markets are heading next.
Using this information as a starting point
For individual investors, these ideas are best seen as background information rather than instructions. They highlight that:
• The Australian sharemarket is unusually concentrated in a few sectors and large companies.
• There are different ways to spread investments, including equal‑weighting sectors or tilting towards value and smaller companies.
• Broad index funds, sector‑balanced strategies and factor-based funds are tools, each with their own strengths and weaknesses.
• Having a clear structure and a regular review process can sometimes be more important than picking the “perfect” product.
Which combination, if any, is appropriate depends on each person’s objectives, financial situation and tolerance for risk. Anyone considering changes to their investments should think carefully about their own position and, if needed, seek personal advice from a qualified professional who can take their circumstances into account. The ideas discussed here are intended to inform and educate, helping investors ask better questions and understand the choices available to them in the Australian sharemarket.
References
• Solving the Australian equities conundrum, Jamie Wickham, Firstlinks, 3 December 2025.
• Australian equities: a tale of two markets, Martin Conlon, Firstlinks, 3 December 2025.
• The unequalled power of equal weight investing, VanEck Australia, 2023.
• Why Equal Weighting Outperforms, EDHEC-Risk Institute / Portfolio Construction Forum, working paper.
• An Index Approach to Factor Investing in Australia, S&P Dow Jones Indices, 2019.
