All of the most well know and largest indices (and their corresponding ETFs) are market capitalization weighted.
Simply put that means that the weighting of any stock in the index is set by multiplying the price of the stock times the number of shares outstanding.
A consequence of this weighting system is that it leads to a very high weighting of some stocks..and sectors...and the weighting increases as the stock price goes up. That means the indices become heavily weighted with stocks that have high valuations.
The phenomenal rise of Apple (AAPL) stock has made it the largest holding in market capitalization weighted indices...and the recent fall in the price of AAPL--16.5% in the last 2 weeks shows the consequences of market cap weighting.
Bloomberg posted a great report on this (text and video) which includes this table of the weightings of aapl in some of the largest ETFs and the impact on returns.Not only do the total stock market index, the SP 500 and Nasdaq (QQQ) ETFs carry a high Apple weighting so do the large cap growth indices and the technology sector ETF,
This shortcoming of market capitalization weighting sometimes referred to as "bubble risk"is a major rationale behind making use of alternative weighting methodologies in passive strategies now referred to as "smart beta" and available through many low cost ETFs. The simplest of these is equal weight which puts the same weighting on all stocks in an index. For example an equal weight SP 500 ETF would hold 1/500 of its assets in each component of the SP 500 index.
While an equal weighting eliminates the defect in market cap weighting, other approaches may merit a closer look. Long term research shows that value stocks (in particular small cap value stocks)outperform growth stocks and market capitalization indices and also that there is a momentum factor that generates long term outperformance vs overall indices.
A long term "evidence based" investment strategy could incorporate both a valuation based strategy and a momentum based strategy through low cost ETFs. These two strategies often work well in tandem with momentum working well in strong up markets and valuation based strategies doing best in other market environments.
Most interesting is that momentum strategies are not the same as growth indices even though the holdings often overlap. The S+P 500 Growth index include the following criteria:
1. Five-year earnings per share growth rate
2. Five-year sales per share growth rate
3. Five-year internal growth rate
And below is the performance( top ) and volatility of the S+P 500 and alternatively weighted ETFs since the AAPL earnings release of April 26. Since that date AAPL has fallen a bit less than 5%.it is down around 15% since April 1.