Category: Investing Insight

Investing insight to make you a better investor.

ETFs vs. Indices

ETFs (Exchange Traded Funds) offer investors a convenient way to gain exposure to a particular index. Since these funds are not actively managed, they are measured by their how cheap they are (in terms of asset management fees) and their tracking error. Before we begin, some key terms:


Kurtosis is a measure of “peakedness” of a distribution. For a normal distribution, Kurtosis is 3. Positive excess Kurtosis indicates fat tails while negative indicates peakedness.


Skewness is a measure of asymmetry of a distribution. Positive skew indicates a long right tail while a negative skew indicates a long left tail.

How effective have Indian ETFs been? Lets pull up some histograms and see for ourselves.



CNX NIFTY-returns-histogram

The Nifty ETF actually shows a -ve skew and a lower kurtosis compared to the index. This is how tracking error and fees manifests itself in daily returns. However, their impact on cumulative returns is minimal. The story for less liquid and higher-fee ETFs are different.



CNX PSU BANK-returns-histogram

Notice the big difference in kurtosis and skewness? This is tracking error personified. The story for the Juniors’ are not that different.



CNX NIFTY JUNIOR-returns-histogram

Given that there really isn’t much of a push either from investors or from asset management firms on ETFs, the dynamics are unlikely to change in the short term.

Alibaba: The Riddle Wrapped in an Enigma

We are setup for an epic fight between Amazon and Alibaba in the US. Something that will be keenly watched by the Bansals, now that they want to be Alibaba instead of Amazon (LiveMint). But what exactly is Alibaba? How did they become a multi-billion dollar company with a finger in every pie?

Alibaba is a lot of different things for different people


If you think it looks like a land-grab, you are right. They basically asked: What would a newly online Chinese consumer want? And connected the dots.

Alibaba is huge

The Wall Street Journal says that Alibaba’s Taobao and Tmall sites reached $240 billion in combined transaction volume last year. By way of contrast, EBay posted $76.5 billion last year in so-called “gross merchandise volume” excluding vehicles.

Alibaba now handles roughly 80% of all online shopping in China. Alipay is not only a payments processor (the world’s largest, at that) but also runs a money-market fund with more than $65 billion in assets.

What are investors buying?

Its hard to say. Alibaba stock will buy investors a stake in a Cayman Islands-registered entity which is under contract to receive the profit from Alibaba’s lucrative Chinese assets but will not actually own them.

The reason is that China permits privately controlled firms in some industries to tap foreign markets by establishing offshore companies permitted to wholly own Chinese companies. Yet it prohibits foreign investments in certain restricted industries, including the Internet. These controlled industries must be owned by Chinese nationals; no foreign investment are allowed.

So, the work-around has been to establish ownership by Chinese nationals, while setting up an offshore company that can be publicly listed. Mimic an owner relationship by setting up contracts between the two parties so that the offshore public firm reaps the successes of the Chinese firm — without actually owning shares in it.

Basically, investors are buying into a story.

Can Flipkart + Myntra = Alibaba?

Hard to say. Social networking in India is basically owned by Facebook (+ WhatsApp). Uber is here, and so are half a dozen home-grown taxi “startups.” Online payments are heavily regulated by the RBI and payments startups are in round 2 of the hunger games. is a looming threat and selling other people’s brands is a lousy business model. Its probably too late to be the “Alibaba of India”… and its probably going to be tougher just hanging on to being the “Amazon of India.”

Besides, isn’t “______ of [something]” a red flag for most venture capital firms? But it seems like its a story that investors are willing to hang their hat on for now.


Smart Beta Strategy Return Analysis

The best part about StockViz Investment Themes is that you can setup a portfolio of stocks that follows a particular strategy. It is a convenient way for you to:

  1. stick to a strategy
  2. follow a preset rebalancing schedule
  3. think in terms of your portfolio strategy rather than individual stocks
  4. avoid common behavioral pitfalls
  5. systematically track your P&L and strategy performance

In StockViz, there are two smart-beta themes: Market Fliers tracks a high-volatility and high-beta portfolio while Market Elephants tracks a low-beta portfolio. Between the two strategies and the Nifty, what should an investor prefer?

Daily Returns

In a bull-market, such as the one we are in, it makes sense to be in a high-beta portfolio. Notice how narrow the low-beta histogram is compared to high-beta, indicating little variation in day-to-day returns. However, you cannot escape the gigantic 10%+ outlier in the Market Fliers.



High Beta (Market Fliers)


Low Beta (Market Elephants)



Any investment will have drawdowns: it is the peak-to-trough decline during a specific period. Market fliers had a horrible couple of months in December-Jan where it saw a jaw-dropping 20% draw-down that took 29 days to recover from.


From Trough To Depth Length To Trough Recovery
2013-Dec-10 2014-Feb-04 2014-Mar-06 -0.057 61 40 21
2013-Nov-05 2013-Nov-13 2013-Dec-09 -0.0519 24 7 17
2014-Apr-25 2014-May-07 2014-May-09 -0.0275 10 8 2
2014-Apr-11 2014-Apr-16 2014-Apr-21 -0.0178 5 3 2
2014-Apr-03 2014-Apr-04 2014-Apr-09 -0.0086 4 2 2

High Beta (Market Fliers)

From Trough To Depth Length To Trough Recovery
2013-Dec-09 2014-Feb-12 2014-Mar-27 -0.1955 75 46 29
2013-Nov-05 2013-Nov-12 2013-Dec-08 -0.1083 22 5 17
2014-Apr-10 2014-Apr-15 2014-May-11 -0.0751 18 3 15
2014-Apr-02 2014-Apr-02 2014-Apr-08 -0.0215 4 1 3
2014-Mar-31 2014-Mar-31 2014-Apr-01 -0.0092 2 1 1

Low Beta (Market Elephants)

From Trough To Depth Length To Trough Recovery
2014-Jan-15 2014-Feb-12 2014-Feb-27 -0.0427 31 21 10
2013-Nov-04 2013-Nov-25 2013-Dec-02 -0.0338 19 14 5
2014-Apr-24 2014-May-06 2014-May-21 -0.0309 19 8 11
2013-Dec-03 2013-Dec-12 2013-Dec-15 -0.024 8 7 1
2013-Dec-29 2014-Jan-06 2014-Jan-13 -0.0219 12 7 5


The wealth chart for market filers is basically a parabola at this point. During the period, the Nifty clocked in +19.26%, Market Fliers +72.42% and Market Elephants +21.16%



High Beta (Market Fliers)


Low Beta (Market Elephants)


Performance vs. Drawdown

How do you tell if these Themes are better than the Nifty? One way to measure relative performance is through the Calmar ratio and the Sterling ratio.

The Calmar ratio is a comparison of the average annual compounded rate of return and the maximum drawdown risk. The lower the Calmar Ratio, the worse the investment performed on a risk-adjusted basis over the specified time period; the higher the Calmar Ratio, the better it performed.

The Sterling ratio = Compounded Annual Return ÷ (Avg. Max Drawdown – 10%)

Just like the Calmar ratio, a higher Sterling ratio is generally better because it means that the investment is receiving a higher return relative to risk.

Calmar Ratio Sterling Ratio
Nifty 6.487609 2.35644
Market Fliers 8.720311 5.768798
Market Elephants 9.828884 2.942523

As you can see, smart beta strategies beat the Nifty both in absolute returns and in risk.

Note: The analysis starts from 2013-Oct-28.

Modi: Temper Your Enthusiasm


The intellectual mainstream in India remains so far to the left of centre, that pushing forward major economic reforms is going to remain a tough sell for the time being. The good news is that a pro-business, results-oriented Modi cannot possibly be worse for the economy than the outgoing government; and, freed from the paralysis induced by a dual power structure, may well be a good deal better.

Read: The heart of Modinomics

Is Modi a leader who will prioritise development, providing jobs and bulldozing bureaucracy? Or will he revert to his Hindu nationalist roots and impose a sectarian agenda on a state largely moulded by the Congress party’s secular principles?

Read: Narendra Modi should stick to his pledge of toilets before temples

Gujarat’s pro-business leadership has created opportunities for entrepreneurs of all creeds; yet religious prejudice and segregation are deeply, and even legally, engrained. A property law unique to Gujarat has perpetuated segregation, creating ghettos such as Juhapura and a sense of apartheid in some urban areas.

The “Disturbed Areas Act”, a law that restricts Muslims and Hindus from selling property to each other in “sensitive” areas, was introduced in 1991 to avert an exodus or distress sales in neighborhoods hit by inter-religious unrest.

Read: In Modi’s India, a case of rule and divide

A whole load of policy certainty has been priced into Indian markets ahead of the Modi-led BJP’s presumed victory in the just finished elections. However, even though this election may have been presidential in nature, India’s system of governance most certainly is not. It is not the central government but the states that are responsible for delaying four-fifths of the big Indian infrastructure projects that are stalled for want of official approvals and chief ministers aren’t easily pushed around.

Read: What if Modi’s a tease?

Also: What can Modi do?

Beyond Payoff Diagrams

In our previous post, we discussed how you can use a Nifty May 6600/6750 Long Put Spread to express a bearish view. However, the payoff diagram, only shows the P&L at expiry. The underlying can take a completely random path towards that payoff, impacting your daily mark-to-market.

Visualizing θ

One way to visualize it to keep all inputs to the model the same and compute the prices of the the options at different price points. Additionally, you can also plot historical values of your spread to give you an idea of where they are at.

NIFTY 6600-6750 Long Put Spread

Note: y-axis is not P&L

As you can see, its only at the very end of the spread’s life that its model value gets pulled towards the values shown in the payoff diagram. This is largely due to θ-decay.


If you are in-the-money on your spreads, then it makes sense to keep the position open till expiry. Most of the gains are accrued at the fag-end of the term.