GDP-Weighted ETFs: A Better Way to Go? | ETF Trends

You’re probably familiar with market cap-weighted exchange traded funds (ETFs). But did you know that if you own a market cap- weighted global index fund, you’d have 50% more money allocated to Switzerland than China? It may be time to consider another way.

That last fact is surprising, given that China’s economy is 10 times larger than Switzerland’s economy. Not to mention, China’s economy is growing at a much faster pace.

The reason for this seemingly illogical weighting is that the MSCI All-Country World Index, one of the most popular global indexes, is composed with a free-floating calculation, reports Matt Hougan of Index Universe.

Basically, MSCI sums up the market caps for all companies trading on major exchanges throughout the world and adjusts the weighting according to the number of freely traded shares. That means that shares held by insiders and governments are not included. [China ETFs: Foreign Investors Look Long-Term.]