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Re-slicing the global pie: FTSE GDP Weighted Index Series

By: Catherine Yoshimoto, Sr. Index Product Manager

When you look at so many products that we buy and consume, is anyone shocked to see “Made in China” on the label? Probably not. It should come as no surprise then that China is now the world’s largest economy.[1] And yet the total capitalization of China’s equity markets open to foreign investors lags far behind its global economic stature. In fact, there are many countries whose market capitalization does not reflect their relative share of the global economy. When a large discrepancy like this does exist, it can make sense to re-slice the global pie.

As we can see below, re-slicing the FTSE All-World market-cap weighted index to reflect the relative size of each country’s economy results in a vastly different looking pie.
 

Re-slicing the global pie – Country Weights (%)


The FTSE GDP Weighted Index Series is designed to set country weightings in proportion to their relative Gross Domestic Product. The goal of this set of indexes is to capture the size of a country’s economy rather than the value of its publicly-traded companies. The weight of each constituent in this index series is adjusted by the proportion of its assigned country’s GDP as calculated by the IMF’s five-year forecasted GDP based on Purchasing Power Parity (PPP).[2] (The indexes are reviewed annually in March)

The resulting country weighting differences between the FTSE All-World GDP Weighted and FTSE All-World indexes is below. We see that emerging economies like China, India and Russia, for example, hold higher weights in the FTSE All-World GDP Weighted Index compared to the market cap weighted FTSE All-World Index. Conversely, developed countries like the United States along with Japan and the UK hold smaller weights.
 

FTSE All-World GDP Weighted Index minus FTSE All-World Index


Based on the resulting differences between developed and emerging country weights, we would expect to see a divergence from the FTSE All-World Index’s performance that corresponds to the relative performance of emerging and developed countries.

As anticipated, we see in the chart below that the FTSE All-World GDP Weighted Index historically outperformed the market cap weighted FTSE All-World Index when emerging countries outperformed developed countries.  The argument could be made that the FTSE GDP Weighted Index Series more closely reflects the performance of the global economy.
 

Index Total Return Difference (%): FTSE All-World GDP Weighted Index minus FTSE All-World Index, and FTSE Emerging Index minus FTSE Developed Index


Any way you slice it, the relative size of a country’s economy may be in stark contrast to its total equity market-cap. When this happens, there can be a large divergence in performance of the relevant indexes. Market participants seeking an index designed to capture the true economic size of a country may find the FTSE GDP Weighted Index Series to be of interest.  

For more information please see the FTSE GDP Weighted Index Series.

 

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[1] As measured by Gross Domestic Product after adjusting for purchasing power parity, Source: IMF, 2015 data from: http://www.imf.org/external/pubs/ft/weo/2016/02/pdf/statapp.pdf.

[2] For more information on the FTSE GDP Weighted Indices and methodology, see: http://www.ftse.com/products/indices/GDP-weighted

 

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