Practical analysis for investment professionals
09 June 2023

A US GDP-Weighted Index?

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.

But to our knowledge, there is no index constructed at the US country level that weights holdings by each sector’s underlying GDP.

So, how would we construct such an index and how would it compare to the S&P 500 in terms of performance and risk?

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

For instance, 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 by our calculation — 10.95% * –0.81% — the Financials industry contributed –0.089% to the overall GDP-weighted index during that particular quarter. 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. The graph below charts the relative performance of the two indices during our 2005 to 2023 time period.

Total Returns of US GDP-Weighted vs. SPX

Chart showing Total Returns of US GDP-Weighted vs. SPX

Based on their total returns, the two indices tracked with statistical similarity from 2005 to mid-2009. But after 2009, the GDP-weighted index outperformed the S&P 500 by over half a percentage point each year up until 2023.

The summary statistics reflect these results as well. 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. The US GDP-weighted index also had a lower average beta — 0.98 — over the sample period.

Mean Total Return10.11%9.61%
Max. Total Return35.23%32.39%
Min. Total Return–35.33%–36.99%
Std. Dev. Total Teturn18.4518.00
Mean Skewness–0.270.22

All in all, 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.

To be sure, our results occur over a limited time period of 18 years. So while 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, this is definitely an area 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.

Image credit: ©Getty Images / Peach_iStock

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About the Author(s)
Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason University School of Business, specializing in exchange-traded fund (ETF) and mutual fund performance. He currently serves as Director of the new Financial Planning and Wealth Management major at George Mason and founded the first student-managed investment fund at GMU.

Jason Howell

Jason Howell is a CERTIFIED FINANCIAL PLANNER™ professional, former US congressional candidate and was recognized as a TOP Wealth Adviser by Washingtonian Magazine, Investopedia, and Northern Virginia Magazine. He is president of Jason Howell Company, a wealth management firm that empowers people who are first generation success stories yet suffer from financial imposter syndrome. He is the author of JOY of Financial Planning: 7 Strategies for Transforming your Finances and Reclaiming your American Dream. He is also an adjunct instructor for George Mason University’s Donald G. Costello School of Business Financial Planning and Wealth Management (FPWM) concentration and was the inaugural Council Chair for the FPWM Advisory Board.

Patrick McManus

Patrick McManus is a junior at George Mason University pursuing a BS in finance. He is interested in retirement planning and efficient market hypothesis (EMH) research. He plans to continue his education and training towards becoming a CFP after graduation.

Luis Paz-Perez

Luis Paz-Perez is a senior at George Mason University pursuing his bachelor's of science degree in business with a concentration in finance. He is interested in financial markets, private equity, and consulting. He currently serves as the president of the Investment Committee for the Montano Student Managed Investment Fund at GMU. After graduation, he will be working towards obtaining his CFA charter.

1 thought on “A US GDP-Weighted Index?”

  1. How does this index look at this moment in time: August 11, 2023?

    It is my belief that the S&P500 constituents have been manipulated to show better returns than a simple reflection of GDP growth. This kind of nonsense went on ahead of the Financial Crisis when Standard & Poors manipulated the creditworthiness ratings of bonds to look better than they really were.
    By any RATIONAL means of valuing equities, we are in a bubble, which began to inflate in late 2016 (coincident with, guess what?). To deflate the bubble, equities need to lose an average of about 35% from where they are today.

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