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.
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). (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.
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.
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.
 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.
© 2016 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.
All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a license from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.