Although this method has its advantages, it does introduce two biases, Hougan says.

  • First, it skews the portfolio to countries with well-developed capital markets.
  • Second, it skews the portfolio away from countries with large insider holdings. The result is that countries such as Australia and Canada are weighted more heavily than China, even though China dwarfs both countries by GDP. [Which ETFs Come With Euro Exposure?]

Since 1988, the GDP weighted MSCI ACWI has outperformed its market cap-weighted peer by 2.7% annually. That’s a huge difference. [6 ETFs That Could Be Hit in European Banking Crisis.]

If you narrow your research down to emerging markets, the difference is greater, with the GDP weighted index outperforming the market weighted index by almost 5% annually.

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  • iShares MSCI ACWI Index (NASDAQ: ACWI)

Sumin Kim contributed to this article.