Paul: Welcome to Index Ideas from FTSE Russell. I'm Paul Amery, your podcast host. In this podcast, we look into how FTSE Russell Indices are built and why. We explore index ideas that can help you address real-world investment challenges. As a reminder to listeners, you can't invest in an index. And so the concepts that we explore in the podcast are not investment advice. Any reference to potential investment strategies is intended for informational and educational purposes only. One of the potential challenges in indexing is that the more debt a government or company issues, the higher its index weight. This is so-called debtor bias. Less politely, the bums problem. There are ways of addressing debtor bias. And today we're going to look at one of them in the context of government bonds.
Paul: In this episode of the podcast, I'm joined by Abhi Desai, who is senior analyst fixed income products at FTSE Russell, and by Olivier Genin, who is deputy head of investment and product strategy, head of fixed income and responsible investment product strategy at Amundi ETF and Indexing. Amundi has recently worked with FTSE Russell on an index that adjusts government bond index weights by a separate factor each country's economic footprint. Abhi and Olivier, welcome to Index Ideas.
Olivier: Thank you, Paul.
Abhi: Thank you Paul. It's great to be here.
Paul: Abhi, let me start with you. What is the GDP-adjusted FTSE World Government Bond Index (FTSE WGBI)?
Abhi: Thanks, Paul. That's a great place to start. And so the simplest way to think about this is that this is an index which provides an alternative allocation to the sovereign government bond universe, where instead of allocating countries based on the size of their debt markets, this is a benchmark which allocates weight in proportion to countries’ economic outputs. So the index still retains all of the WGBI’s eligibility criteria. So the minimum outstanding requirements, the country eligibility, the market classification, bond type screenings, everything that makes the WGBI investable and such a widely used benchmark remains the same. And within each country, individual bonds are also still proportionally weighted by market values. So this helps us maintain investability at the bond level and makes rebalancing somewhat easier. But whereas the WGBI is entirely market cap-weighted, the GDP-adjusted WGBI has country weights set each month using the latest IMF figures for nominal GDP. So ultimately, this allows us to preserve the stability of the WGBI and achieve a broader objective of allocating government bond exposure according to the full economic size of each constituent market.
Paul: Thank you Abhi. Olivier, why did Amundi decide to work with FTSE Russell on this index?
Olivier: So as you rightly mentioned in your intro, the concentration has increased and we have seen simply a growing investor demand for alternatives to traditional benchmarks over the past few years. So FTSE Russell, they brought the independent index expertise that we needed to build something credible and robust. And I'd say the pair of Amundi investment thinking with FTSE Russell's index construction capabilities made the project natural.
Paul: Thanks, Olivier. And why might index users want to reweight a standard market cap or market value-weighted bond index?
Olivier: So a standard bond index weights issuers by how much debt they have outstanding. So naturally the biggest borrowers gets the biggest weight. Reweighting lets you shift the focus away from pure issuance volume and towards things like fundamentals, resilience and diversification instead.
Paul: Thanks, Olivier. Abhi, let me come back to you in terms of the construction methodology of the GDP-adjusted FTSE WGBI. Why use GDP as the weighting factor and how do we measure it?
Abhi: Yeah for sure. That is a very good question. So starting with why use GDP to re-weight? Because as Olivier said, market-cap weighting is still of course a standard in fixed income. But the thesis here is that that's not exactly neutral approach to investment either, since you're allocating based on the size of the issuer's outstanding debt. So in equities, that can be quite intuitive and makes sense because you're allocating to fast-growing companies. But in fixed income, you're kind of inherently favouring markets that issue a large amount of debt. So the reason we're using GDP to re-weight here is because each country allocation is reflective of the size of the overall market, rather than just the size of the country's debt market. So while outstanding debt can jump after a crisis or a government spending spree, economic output generally changes more gradually over time. So that can create a steadier and, in many ways, more predictable benchmark in terms of country allocations. And finally, GDP also captures the scale of production and income generation in an economy. So in a sovereign context, this can be very closely related to domestic demand and the size of the tax base, which ultimately is what supports public finances and fiscal strength, which in the case of a sovereign index is the size of the issuer. And as to the second part of your question, how we measure GDP, we have some variations here, actually. But the GDP-adjusted version used here uses nominal GDP in US dollars from the IMF World Economic Outlook report. So we use the GDP numbers to identify relative weights for all countries in the WGBI. The report from the IMF is refreshed twice a year, so we carry those numbers forward for each monthly index profile until the next IMF report comes out.
Paul: Thanks for explaining that Abhi. Olivier, how does GDP weighting a bond index help address changes in the global economy?
Olivier: GDP weighting ties country weights to actual economic output rather than, as we said before, market cap or debt outstanding. So as global economy evolves, it means that index this type of index can better reflect where growth is actually happening. Traditional benchmarks do catch up but tend to be slow to catch up. They usually stay concentrated in markets that are dominant already, even as other economies grow in importance. So GDP-weighting helps correct for this specific point. The bottom line is that it's I guess a smart way to align portfolio exposure with the changing shape of the world economy.
Paul: Thanks, Olivier. Abhi, how has the credit rating of the FTSE World Government Bond Index, or FTSE WGBI, as we call it in short, how has that changed over time?
Abhi: For sure. So the ratings here are actually quite interesting because despite the changes in country weights, the overall credit profile has been remarkably stable both over time within the WGBI. And if you compare the GDP-adjusted WGBI with the base WGBI. So looking back over the past decade, both the WGBI and the GDP-adjusted version have generally remained in the double A range. The base WGBI index moved closer to double A minus for a period following downgrades in large markets. I believe it was Japan and the UK. The GDP-adjusted version held up somewhat better in those early years because it had greater exposure to Triple-A markets such as Australia, Canada, Germany, a little less exposure to Japan and Italy. The WGBI itself had upgrades over time in Southern Europe and Ireland, which helped strengthen that wider universe back to double A, and the largest change came for the GDP-adjusted index when China entered the WGBI at A plus. So China receives a much larger allocation when countries are weighted by GDP. So its inclusion increased the A-rated share and brought the overall credit profiles between the GDP index and the base WGBI a lot closer together at a stable double A. So today both indices sit at around double A. The GDP-adjusted index has more exposure at triple A and single A with less in the double A and triple B buckets. So the overall credit quality remains quite similar across the WGBI and the GDP adjusted index, even though the countries contributing to that rating have changed a fair bit over time.
Paul: Thanks, Abhi. In terms of country weights, can you explain what the impact is of this GDP adjustment? What are the changes in the main changes in the country weights comparing the FTSE WGBI to the GDP-adjusted WGBI.
Abhi: Yeah. So there are three variations here that are potentially worth discussing. So one is the base index obviously. Another is a purchasing power parity adjusted WGBI. And then of course we have the nominal GDP-adjusted WGBI which is the one that's used here. So weighting by PPP actually shifts the balance of weights quite decisively compared to the base WGBI. So PPP-adjusted GDP measures output after adjusting for local price levels. So economies where goods and services are cheaper appear larger than they do at market exchange rates. So in the WGBI, that produces a very major rotation towards China and a broader group of emerging markets. So using the August 2026 profile, for instance, the US falls from about 41% in the base WGBI to 25% of the PPP-weighted WGBI. And PPP-weighting also raises China from roughly 12% to about 33% and makes it the largest country. So the nominal GDP-weighted index sits somewhere between those two extreme outcomes, with the US at around 35% and China at about 22%. And with GDP weighting, there's also a general systematic underweighting of developed markets balanced out by increases in smaller bond markets. So in PPP-weighted versions, for example, Italy, France and Japan each lose about three percentage points in August 2026. Mexico more than triples in weight to 2.7%. Korea moves from 1.2 to 2.7%, and Poland and Malaysia also gain quite meaningfully. So really, the GDP-weighted version reflects and both GDP-weighted versions reflect a wider idea of sovereign debt allocation based on economic output. And PPP adjustment is an enhanced version of the EM impact and counteracts that weaker local currency factor.
Paul: Thanks very much, Abhi. Olivier, how does this index fit into the current fixed income market environment?
Olivier: Right now, investors are dealing with rising debt levels, heavy sovereign issuance and growing concentration in, let's say, traditional benchmarks. So the massive advantage of a GDP-weighted approach is that it anchors country weights to, as I mentioned before, economic strength rather than how much debt the country has issued. And the second point, it's like a domino effect because GDP moves more gradually than issuance does. The index effectively is less exposed to short-term swings. So for investors thinking seriously about diversification, which is in my opinion the main point, but also benchmark construction, it's genuinely a useful tool right now. I mean, Abhi just mentioned the impact on country weights. Clearly the diversification advantage of a GDP weight solution is undeniable.
Paul: Thank you, Olivier. Abhi, you mentioned this or you touched on this a bit earlier, but could you explain to listeners and viewers how the GDP-adjusted WGBI compares with the parent index in terms of overall index methodology?
Abhi: So from a methodology and governance perspective, actually, the GDP-adjusted index stays very close to the base WGBI. So FTSE continues to decide which countries and bonds qualify under the WGBI’s eligibility criteria. So bond eligibility remains exactly identical. There's reconstitution at the beginning of every month, which results in the exact same constituent profiles. The list of constituents based on the WGBI and the GDP-adjusted WGBI and between monthly rebalances, of course, is allowed to move freely intra-month. And if any criteria change in the WGBI, such as, let's say, a change in the list of eligible countries that will update automatically in the GDP WGBI as well. So the only difference is going to be the country weighting. And finally from a methodology standpoint, there are also a number of variations which can come from this. So depending on requirements, we've explored and researched various forms of factor tilts and country caps and other customisations which use that identical original WGBI methodology but incorporate GDP-weighting mechanisms. And there are a lot of potential variations that can come from this.
Paul: Thanks, Abhi. Olivier, are you at Amundi applying this GDP-weighting or GDP adjustment approach to other asset classes and if so, how?
Olivier: So we do, but in a slightly different way. In fixed income, you know, we've said it, GDP weighting, it's about the country weights or linking the country weights to the economic scale and the debt servicing capacity. In equity, we use GDP to set the country level weights first and then apply standard market cap weighting within each country at stock level. So in a way, it adjusts the top-down allocation but also keeps the efficiency and the liquidity of normal index construction bottom up. So across the board, in fact, no matter the asset class, no matter how we do it, the goal is exactly the same. It has to be robust. It's a diversified alternative that's grounded in economic reality, slightly away from just market size.
Paul: Well, thank you both for this very comprehensive overview of an interesting index idea. Any final thoughts? Abhi, let me start with you.
Abhi: Yeah for sure. So the most interesting result for me that we found in our research looking into this index is that such a large change in country allocation can still leave investors with something that behaves very much like the base WGBI. So since inception, the GDP-adjusted index retains roughly a 99% correlation with the base index, about a 1.1% tracking error. You have a 98% plus first difference yield correlation. And as Olivier mentioned, this happens while diversifying exposure a lot. So country exposure has spread a lot more broadly and overall concentration is reduced.
Abhi: So using the Herfindahl–Hirschman Index for example, you're looking at about a 0.5 point increase in the effective number of issuers across the board across time. So this is quite remarkable, actually, from a tracking standpoint, and also increases the diversification. And, focusing on design rather than history, market value weighting really gives investors a view on the tradeable sovereign debt market. And GDP adds insight into the actual economies behind that debt. So for investors using government bonds for long-term exposure, it's a very useful concept and definitely something worth exploring.
Paul: Thank you Abhi. Olivier, any final thoughts from you?
Olivier: Yes. Thanks for the opportunity. So I think the big picture here is that the markets are obviously changing. What we've tried to do with FTSE Russell is to build something that reflects the world as it is actually today. And we've used for that GDP. So just to be clear, it's not about replacing traditional benchmarks everywhere. It's about giving investors, I would say, another rule based economically grounded option to consider, whether it's fixed income or equity. So if you look at, and I would suggest everyone to do their homework, I would say you look at your benchmark, you look at how they are constructed. And you should ask yourself whether they still reflect where the world's economic activity is actually happening. Whether you're happy or not with it, then of course, you can decide on a different type of allocation or another way of investing.
Paul: Thank you both for joining Index Ideas.
Olivier: Thank you.
Abhi: Thanks, Paul.
Paul: That's it for this episode of Index Ideas. If you've enjoyed the conversation, then please follow us and give us a rating or review on your podcast app of choice. If you'd like to get in touch with the show, you can do so via the email address
[email protected]. But for now, from me, Paul Amery. Goodbye.
