Index investing as a long term passive wealth building strategy is a wonderful tool. Eight years ago, Warren Buffett selected the Vanguard 500 Index Fund Admiral Shares (MUTF:VFIAX), which tracks the benchmark S&P 500 index, as a bet with Protege Partners, a New York City money management firm. The index fund has since been up 65.7 percent. That’s well ahead of the 21.9 percent average gain for the unnamed five funds of hedge funds chosen by Protege Partners that believe to be able to outperform the market over a 10 year period.

However, not all index funds are created equal. In the most recent commentary letter from the First Eagle Investment Management, First Eagle pointed out that the top 10 contributing stocks of the S&P 500 index as a percentage of the total index return reached 240% in 2015. The top 10 performing stocks had a positive return of 3.31%, while remaining stocks had a negative return of -1.93% for a combined total index return of 1.38%.

(Source: First Eagle Investment Management)

As shown in the following two charts, both are S&P 500 index funds but show a very different sector allocations due to the first one being a equal weighted index (the Guggenheim S&P Equal Weight Technology ETF (RYT)) and the second one being a market weighted index (the SPDR S&P 500 Trust ETF (SPY)).

(Source: The Street)

As a side note, it becomes even more important to distinguish sector market and equal weighted funds. For example, the Technology Select Sector SPDR ETF (NYSEARCA:XLK) has about 25% of its holdings in just two companies, Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), so the performance of Apple and Microsoft has tremendous influence on the overall index return.

With a passive investing strategy, investors risk overweight stocks that have risen and underweight stocks that have underperformed in a market weighted index funds. As shown in the chart below, an equal weighted index will outperform market weighted index in situations when less weighted stocks achieved higher returns.