A US GDP-Weighted Index? | CFA Institute Enterprising Investor

Index fund buyers have varied decisions when deciding on the weighting model of the funds they maintain. There are market cap-weighted indices just like the S&P 500 and the Russell 2000/3000, inventory price-weighted indices just like the Dow Jones Industrial Common, in addition to equally weighted indices.

However to our information, there isn’t any index constructed on the US nation degree that weights holdings by every sector’s underlying GDP.

So, how would we assemble such an index and the way would it not examine to the S&P 500 when it comes to efficiency and danger?

To create our US GDP-weighted index, we broke the S&P 500 down into its 11 underlying sectors and pulled the info for every sector’s corresponding Vanguard exchange-traded fund (ETF) going again to 2005. Subsequent, we took every sector’s contribution to GDP at the beginning of every quarter and calculated every sector’s GDP contribution over the next quarter and multiplied that by the sector’s relative GDP weight at the beginning of the quarter. That gave us the sector’s contribution to the index’s general return over that quarter.

For example, if Financials contributed 10.95% to US GDP within the first quarter of 2015 and the Vanguard Financials ETF (VHF) declined 0.81% that quarter, then by our calculation — 10.95% * –0.81% — the Financials trade contributed –0.089% to the general GDP-weighted index throughout that individual quarter. Including up all 11 sectors’ contributions yields the index’s general return within the first quarter of 2015.

Evaluating this GDP-weighted index to the S&P 500 over time highlights some fascinating variations in efficiency. The graph under charts the relative efficiency of the 2 indices throughout our 2005 to 2023 time interval.

Whole Returns of US GDP-Weighted vs. SPX

Based mostly on their whole returns, the 2 indices tracked with statistical similarity from 2005 to mid-2009. However after 2009, the GDP-weighted index outperformed the S&P 500 by over half a proportion level every year up till 2023.

The abstract statistics replicate these outcomes as properly. The US GDP-weighted index averaged an annualized return of 10.11% in comparison with 9.61% for the S&P 500 over the pattern interval. The US GDP-weighted index additionally had a decrease common beta — 0.98 — over the pattern interval.

All in all, the outcomes point out {that a} US GDP-weighted index could provide the potential for extra returns with related ranges of danger in comparison with its benchmark.

To make certain, our outcomes happen over a restricted time interval of 18 years. So whereas it’s too early to make a definitive assertion about what such an index can ship relative to a value-weighted index just like the S&P 500, that is positively an space worthy of additional examine and evaluation.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.

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Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason College Faculty of Enterprise, specializing in exchange-traded fund (ETF) and mutual fund efficiency. He at present serves as Director of the brand new Monetary Planning and Wealth Administration main at George Mason and based the primary student-managed funding fund at GMU.

Patrick McManus

Patrick McManus is a junior at George Mason College pursuing a BS in finance. He’s occupied with retirement planning and environment friendly market speculation (EMH) analysis. He plans to proceed his training and coaching in direction of changing into a CFP after commencement.

Luis Paz-Perez

Luis Paz-Perez is a senior at George Mason College pursuing his bachelor’s of science diploma in enterprise with a focus in finance. He’s occupied with monetary markets, personal fairness, and consulting. He at present serves because the president of the Funding Committee for the Montano Scholar Managed Funding Fund at GMU. After commencement, he can be working in direction of acquiring his CFA constitution.