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Learning, Sharing, and Teaching => Investor Alley => Topic started by: xenon5 on December 30, 2015, 10:00:24 AM

Title: Why don't Total International indexes match worldwide GDP share?
Post by: xenon5 on December 30, 2015, 10:00:24 AM
From looking at the prospectus for Vanguard's Total Intenational stock fund, I noticed that the % equity exposure for some countries is out of line with the country's GDP relative to other countries. 

For example, UK companies account for 15% of the index, France 6.4%, and Germany 6.2%.  Yet looking at a list of nations by total GDP, France and the UK have similar GDP, and Germany's GDP is significantly higher than either.

Is this because international companies are more likely to domicile in the UK relative to other EU countries, and an outsize amount of their business occurs elsewhere?
Title: Re: Why don't Total International indexes match worldwide GDP share?
Post by: seattlecyclone on December 30, 2015, 10:09:45 AM
I think the indexes are weighted by market capitalization (total value of all shares in publicly traded companies) rather than GDP. Many things could explain the difference between the two numbers. Remember that GDP is a measure of the value of goods and services produced within an economy during a year. This is a very different thing than the market value of the private businesses in the economy, which is in turn a step removed from the market value of publicly traded businesses.
Title: Re: Why don't Total International indexes match worldwide GDP share?
Post by: J.Milly on December 30, 2015, 01:33:40 PM
The reason is that the Vanguard fund is market cap weighted, so its proportional based on the value of the companies in the country. Ie. US GDP is about 16.77 Trillion, while the total stock market cap of the US market is 18.66 trillion (or something there about). GDP is defined as the total value of all finished goods produced in a country. This is obviously going to diverge from the stock market value as a great many prices rise and fall due to speculation, market sentiment, etc.
Title: Re: Why don't Total International indexes match worldwide GDP share?
Post by: cerat0n1a on December 30, 2015, 04:02:45 PM
There's at least 2 other factors that explain the difference between UK and France/Germany.

One is that the role of the gvernment/public sector is far lower in the UK compared with other European countries - things like the post office, railway, electricity, gas, water, telecoms are through listed companies in the UK, but not necessarily so in France or Germany. Also in Germany, many large companies are partially owned long-term by banks and so the %age of the company of the company which is traded on an exchange may be much less than 100%. The same is true in France for government ownership. As an example, the largest chipmaker in Europe is ST Microelectronics, it's now down to below 30% government ownership, having been much higher in the past, but it still means that the market cap on the stock exchange is not representing the full contribution to the GDP. Germany also has a much higher %age of private/family companies than elsewhere in Europe.

The other big reason is the one that you alluded to. The UK stock exchange has some mega-corporations that make the bulk of their profits outside the UK, but are listed in London - particularly in oil, mining and banking. France & Germany does not have this. You might notice places like Netherlands (with Shell, Unilever) and Switzerland have similarly large %ages relative to their GDP.