Index fund investors have a variety of options when choosing the weighting style for their fund holdings. There are market capitalization weighted indices such as the S&P 500 and Russell 2000/3000, stock weighted indices such as the Dow Jones Industrial Average, and equal weighted indices.
However, to our knowledge, there is no US country-level constructed index that weights wealth holdings based on each sector’s underlying GDP.
So how would such an index be constructed, and how does it compare to the S&P 500 in terms of performance and risk?
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To create the U.S. GDP-weighted index, we divided the S&P 500 into 11 underlying sectors and extracted the corresponding Vanguard Exchange Traded Fund (ETF) data for each sector going back to 2005. We then calculated the contribution of each sector to GDP. Calculate each sector’s GDP contribution at the start of each quarter, calculate each sector’s GDP contribution in subsequent quarters, and multiply it by the sector’s relative GDP weight at the start of the quarter. This gave us an idea of the sector’s contribution to the overall index return for the quarter.
For example, if the financial industry contributed 10.95% to US GDP in the first quarter of 2015 and the Vanguard Financials ETF (VHF) fell 0.81% in the same quarter, our calculations show that the financial industry’s contribution is -0.089% and 10.95% * -0.81%. Convert to an overall GDP-weighted index for that particular quarter. Combining the contributions of all 11 sectors gives the overall index return for Q1 2015.
Comparing this GDP-weighted index to the S&P 500 over time reveals some interesting differences in performance. The graph below shows the relative performance of his two indices over the period from 2005 to his 2023.
Comparing US GDP-weighted total returns and SPX
![Chart showing US GDP weighted vs. SPX total return](https://i0.wp.com/blogs.cfainstitute.org/investor/files/2023/06/Total-Returns-of-US-GDP-Weighted-vs-SPX.png?resize=640%2C370)
Based on total returns, the two indices showed statistically similar trends from 2005 to mid-2009. But since 2009, the GDP-weighted index has outperformed the S&P 500 by more than half a percentage point each year through 2023.
Summary statistics also reflect these results. The average annualized return for the US GDP-weighted index was 10.11% over the sample period, while the average return for the S&P 500 was 9.61%. The US GDP-weighted index also had a low average beta value of 0.98 over the sample period.
GDP index | SPX | |
average total return | 10.11% | 9.61% |
maximum.total return | 35.23% | 32.39% |
minute.total return | –35.33% | –36.99% |
Standard Developer Total Titan | 18.45 | 18.00 |
average skewness | –0.27 | –0.22 |
Overall, the results show that the US GDP-weighted index has the potential to deliver excess returns relative to the benchmark with a similar level of risk.
Indeed, our results were obtained over a limited period of 18 years. As such, it is too early to form a definitive opinion as to what effect such an index would have compared to a value-weighted index such as the S&P 500, but this is arguably amenable to further research and analysis. It’s a worthy field.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of the CFA Institute or the author’s employer.
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