Index fund investors have several options when choosing the weighting form of the funds they hold. There are market capitalization-weighted indices corresponding to the S&P 500 and the Russell 2000/3000, stock price-weighted indices corresponding to the Dow Jones Industrial Average, and equally weighted indices.
However, to our knowledge, there is no such thing as a U.S. country-level index that weights holdings by each sector’s underlying GDP.
So how would we construct such an index and the way wouldn’t it compare when it comes to performance and risk to the S&P 500?
To create our U.S. GDP-weighted index, we divided the S&P 500 into its 11 underlying sectors and retrieved data for every sector’s corresponding Vanguard Exchange Traded Fund (ETF) from 2005. Next, we determined each sector’s contribution to GDP. At the start of every quarter, he calculated each sector’s GDP contribution in the next quarter and multiplied this by the sector’s relative GDP weight at first of the quarter. This allowed us to find out the sector’s contribution to the index’s total return for the quarter.
For example, if the financial sector contributed 10.95% to US GDP in the primary quarter of 2015 and the Vanguard Financials ETF (VHF) declined by 0.81% in that quarter, then by our calculation the financial sector contributed -10.95% * -0 .81% – –0.089%. to the general GDP weighted index during that specific quarter. Adding the contributions of all 11 sectors gives the overall return of the index in the primary quarter of 2015.
Comparing this GDP-weighted index to the S&P 500 over time reveals some interesting differences in performance. The following graphic shows the relative performance of the 2 indices from 2005 to 2023.
US GDP-weighted total returns vs. SPX
Based on their total returns, the 2 indices showed statistical similarity from 2005 to mid-2009. But after 2009, the GDP-weighted index outperformed the S&P 500 by greater than half a percentage point yearly through 2023.
The summary statistics also reflect these results. The US GDP-weighted index produced a mean annual return of 10.11% over the sample period, in comparison with 9.61% for the S&P 500. The US GDP-weighted index also had a lower average beta of 0.98 over the sample period on.
| GDP index | SPX | |
| Average total return | 10.11% | 9.61% |
| Max total return | 35.23% | 32.39% |
| Minimum. Total return | -35.33% | –36.99% |
| Hours Developer Total Teturn | 6.45 p.m | 6 p.m |
| Medium skew | -0.27 | –0.22 |
Overall, the outcomes suggest that a U.S. GDP-weighted index could offer the potential for excess returns at similar levels of risk in comparison with its benchmark.
Of course, our results are from a limited period of 18 years. While it continues to be too early to make a definitive statement about what such an index can do in comparison with a value-weighted index just like the S&P 500, this is certainly an area worthy of further study and evaluation.
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Photo credit: ©Getty Images / Peach_iStock
