What Is a Tiered Weighting Approach?

A tiered weighting approach is a method of building an index or ETF where the stocks are grouped into tiers (levels) based on their size, importance, or other criteria and each tier gets a different weighting rule.

It’s a hybrid method between a pure “market-cap weighting” (where big companies dominate) and an equal-weight approach (where all companies get the same weight).

How It Works (Step by Step)

1) Group companies into tiers.
The index or ETF divides its holdings into groups based on their size, activity, or thematic relevance.

For example:

• Tier 1 – “Pure-Play Companies”: Companies concentrating on a single line of business, particular product or activity.
• Tier 2 – “Related Companies”: Companies with partial exposure to the targeted business (product or activity).

2) Assign weight to each tier.
Each group receives a specific percentage of the total portfolio to ensure balance between tiers.

For example:

• Tier 1 (Pure-Play): minimum 20% of the total weight
• Tier 2 (Related Companies): maximum 80% of the total weight

3) Weight companies within each tier.
Inside each tier, companies can be weighted in several ways depending on the methodology.

For example:

• Maximum 8% per company in the “Pure-Play” tier
• Maximum 4% per company in the “Related Companies” tier

4) Rebalancing.
Over time, stock prices and market values change, which can alter the weights of companies in the index.
To keep the index aligned with its methodology and objectives, it is periodically rebalanced to adjust weights and, if necessary, replacing components.