International equity portfolios: Selecting the right benchmark for emerging markets

Abstract

We examine two alternatives to the cap-weighted index for emerging markets: the GDP-weighted and the equally weighted (EW) indices. Over the 1990–2004 period, the GDP-weighted index dominates the cap-weighted index, and represents a promising alternative benchmark for the investment policy. The EW index dominates all indices even after reasonable transaction costs are included. Three factors seem to play a role in explaining the EW index dominance: low concentration, more frequent rebalancing and larger allocations to small countries. Managing a fraction of an equity portfolio according to an EW scheme stands for a promising avenue to add value to the policy benchmark.