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

Key Points:

• There is currently no US country-level index that weights holdings by each sector’s underlying GDP.
• To create a US GDP-weighted index, the S&P 500 was broken down into its 11 underlying sectors and the data for each sector’s corresponding Vanguard exchange-traded fund (ETF) was pulled from 2005.
• The index’s overall return for each quarter was calculated by multiplying each sector’s contribution to GDP by its relative GDP weight.
• The GDP-weighted index outperformed the S&P 500 by over half a percentage point each year from 2009 to 2023.
• The GDP-weighted index had an average annualized return of 10.11% compared to 9.61% for the S&P 500 over the sample period.
• The GDP-weighted index demonstrated similar levels of risk compared to the S&P 500.

Index fund investors have various choices when selecting the weighting style of the funds they hold. There are market cap-weighted indices like the S&P 500 and the Russell 2000/3000, stock price-weighted indices like the Dow Jones Industrial Average, as well as equally weighted indices.

However, there is currently no index constructed at the US country level that weights holdings by each sector’s underlying GDP.

So, how would one go about constructing such an index and how would it compare to the S&P 500 in terms of performance and risk?

To create a US GDP-weighted index, the S&P 500 was broken down into its 11 underlying sectors and the data for each sector’s corresponding Vanguard exchange-traded fund (ETF) was pulled from 2005. Next, each sector’s contribution to GDP at the start of each quarter was taken into account. The sector’s GDP contribution over the subsequent quarter was then calculated and multiplied by the sector’s relative GDP weight at the start of the quarter. This gave the sector’s contribution to the index’s overall return over that quarter.

For example, if Financials contributed 10.95% to US GDP in the first quarter of 2015 and the Vanguard Financials ETF (VHF) declined 0.81% that quarter, then the Financials industry contributed -0.089% to the overall GDP-weighted index during that particular quarter (10.95% * -0.81%). Adding up all 11 sectors’ contributions yields the index’s overall return in the first quarter of 2015.

Comparing this GDP-weighted index to the S&P 500 over time highlights some interesting differences in performance. A graph displaying the relative performance of the two indices from 2005 to 2023 shows that the GDP-weighted index outperformed the S&P 500 after 2009, with an outperformance of over half a percentage point each year.

Total Returns of US GDP-Weighted vs. SPX

Based on their total returns, the US GDP-weighted index averaged an annualized return of 10.11% compared to 9.61% for the S&P 500 over the sample period. Additionally, the US GDP-weighted index had a lower average beta of 0.98 over the sample period.

Overall, the results indicate that a US GDP-weighted index may offer the potential for excess returns with similar levels of risk compared to its benchmark, the S&P 500.

It is important to note that these results are based on a limited time period of 18 years. Therefore, it is too early to make a definitive statement about what such an index can deliver relative to a value-weighted index like the S&P 500. However, this area is definitely worthy of further study and analysis.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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