Global, GDP-Weighted Portfolio

Late last year, my friend Michael and I had an idea for a global index: a portfolio allocated to international ETF’s based on weighted GDP growth of the countries. This contrasts with most global indexes, such as MSCI, whose allocation is based on market capitalizations.

I should note that we have no real idea about how the portfolio would have done in the past because back-testing proved prohibitively complex and expensive.

In any case, our idea was based on two basic assumptions:

1. The equity markets, over long periods of time, tend to go up at roughly the rate of GDP growth in a country.

2. We knew that the portfolio would be incredibly volatile – this would make it ideal for a long-term investor who was dollar-cost-averaging into the portfolio

We were certainly right about #2: if we had gotten into the portfolio last year, we would have lost a fortune! Emerging markets – which would make up a large percentage of the portfolio because of their above-average GDP growth – have been slammed this year. Nevertheless, for people who want an EM allocation, now is certainly a better time to buy than 6 months ago…

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: