The Case For GDP-Weighted Equities

May 24, 2010

 

If you exclude the
U.S.
, the results are even more dramatic. The market caps of the U.K., Canada and Australia are massively out of line with GDP weights, while Germany, China and
Brazil
get a bump from GDP weighting.

 

Market Cap

GDP Weight


Japan

15.73%

10.81%


UK

14.78%

4.66%


Canada

7.06%

2.85%


France

6.69%

5.71%


Australia

6.47%

2.13%


Germany

5.97%

7.15%


Switzerland

5.39%

1.06%


China

3.81%

10.47%


Brazil

3.28%

3.36%

Over almost any time period you look at, the GDP-weighted indexes have outperformed their market-cap weighted peers. MSCI has been producing GDP-weighted indexes since 1988, and since that start date through November 2009, the GDP-weighted MSCI ACWI has outperformed its market-cap-weighted peer dramatically, delivering 7.4 percent annualized returns versus 4.7 percent for the market-cap benchmark.

Focus down to the MSCI Emerging Markets index and the difference is even larger: the GDP-weighted version has delivered 14.5 percent in annualized returns versus just 9.6 percent for the market-cap-weighted benchmark.

Both have done so while adding only a small measure of additional risk.

According to the MSCI study that serves as the source of the performance data, GDP-weighted indexes show little style, sector or index bias compared to market-cap weighted peers. Instead, “GDP weighting seems to be an active bet on the country and currency factors, allocating more to emerging markets and less to developed markets,” it says.

In today’s market, it may be an active bet worth making.

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