RT Journal Article
SR Electronic
T1 Improving Emerging Market Equity Performance through Equal-Weight Country Indexing
JF The Journal of Index Investing
FD Institutional Investor Journals
SP 18
OP 30
DO 10.3905/jii.2011.1.4.018
VO 1
IS 4
A1 R. McFall Lamm, Jr.
YR 2011
UL https://pm-research.com/content/1/4/18.abstract
AB Capitalization-weight orthodoxy now dominates in the equity indexing world despite the fact that research indicates it is inefficient and underperforms valuation-indifferent approaches. However, a more important issue for multinational indices—especially in the case of emerging markets—is the method used to determine country weights. Pure cap-weighting allows country exposures to indiscriminately fall out of the bottom-up aggregation process, which significantly over-concentrates risk in only a few countries. This study demonstrates that employing an equal country weighting scheme for emerging markets would have hugely outperformed cap-weighting for the past quarter century. Equal weighting reduces risk by increasing diversification across divergent macro policy regimes and is mean–variance optimal in a special case. In contrast, cap-weighting forces investors into riskier exposure to overvalued markets and is mean–variance inefficient. Unfortunately, there are no equal-weighted broad emerging market indices or commercial products available. Using emerging market country ETFs offers a partial solution, although the full range of emerging markets is not covered and liquidity is sometimes limited.TOPICS: Emerging, exchange-traded funds and applications, mutual fund performance