Tag: ETF

EM Bonds out-performed EM Equities the last decade

A recent article in WSJ had this to say about emerging market bonds:

Research on hard-currency bonds since Britain and Prussia defeated France at the Battle of Waterloo in 1815 shows that on average the return from lending to governments issuing external debt in sterling or dollars delivered a return close to U.S. stocks, with lower volatility.

EM bonds giving better returns than US stocks seems counter-intuitive. There is an ETF that tracks the bond index that the article talks about: EMB – iShares JP Morgan USD Emerging Markets Bond ETF. The ETF was launched on December 2007 (not during the Battle of Waterloo,) so we cannot really put that claim to test. However, here are the last 10-years for EMB, EEM (iShares MSCI Emerging Markets ETF) and SPY (SPDR S&P 500 ETF Trust):
ETF.EMB-EEM-SPY.cumulative returns

EM bonds beat EM equities, but not US stocks (SPY). US mega-caps pretty much beat every other equity market. Here are the MSCI indices of USA, WORLD ex US and EM:
USA, WORLD ex-USA, EM cumulative returns

Can’t really single out EM for under-performance when everything trailed. Besides, if you look at performance since 1987, aggregate returns from EM have been on par with those of US with complementary periods:
USA, WORLD ex-USA, EM cumulative returns

So, should you ditch your EM equities portfolio and get into EM bonds and US stocks? Some analysts could look at a decade of EM equity under-performance, point to its valuation spread vs. US mega-caps, and conclude that EMs are a better place to be for the next decade. While others could point out that the US is the home to most of the world’s biggest tech monopolies so it deserves the out-performance. We will only know who is right once 2030 rolls in. Until then, diversify your portfolio and enjoy your life.

Code and annual return charts are on github.

SMA Strategies using ETFs

A simple moving average of an index is nothing but the average of closing prices of that index over a specified period of time. We did a quick backtest to see how an SMA based toggle between going long an index vs. cash performed.

Cumulative returns








The backtest, unsurprisingly, shows that shorter the SMA look-back period, better the performance. However, the boost in performance comes at the expense of higher number of trades. Lower look-backs are only viable now thanks to brokerages where you would pay zero for these trades (however, you still pay the securities transaction tax.) To see how this would shake out in the real world, have a look at how our Tactical Midcap 100 Theme has performed in the last ~2 years:

The Theme used the M100 ETF (Motilal Oswal Midcap 100 ETF) with a 10-day SMA toggle to switch between the ETF and LIQUIDBEES. The blue line represents zero brokerage and 0.1% STT and the green line represents a brokerage of 5p and 0.1% STT. The chart shows it beating an actively managed midcap fund across all transaction fee scenarios.

The snag is that this strategy is tough to scale. The M100 ETF just doesn’t trade enough for this strategy to absorb more than Rs. 10 lakhs. And there is no small cap ETF on the horizon to implement the strategy in that space.

The second problem is that M100 trades to a wide premium/discount to NAV (see: ETF Premium/Discount to NAV.) This is another layer of risk that an investor could do without.

However, things seem to be moving in the right direction. Reliance Capital launched a new ETF recently that tracks the NIFTY MIDCAP 150 index. Their ETFs usually trade better – tighter spreads, narrower tracking errors, better liquidity. Hopefully, it will emerge as a stronger alternative to M100 and allow these strategies to scale. We setup the Tactical Midcap 150 Theme that uses the RETFMID150 ETF instead of the M100 ETF for those who are interested.

In Part II, we will see how adding a simple check on the SMA can reduce drawdowns.

Code and charts are on github.

MSCI USA Momentum Index

In our previous post, Momentum: Peek under the hood before you invest, we compared a couple of momentum ETFs listed in the US. The most popular one, MTUM, was launched in April 2013. For an investor who is considering it, a five-year sample size is hardly enough. Thankfully, the ETF tracks the MSCI USA Momentum Index. And even though the index itself was launched in February 2013, MSCI has back-filled index levels going back from 1975.

USA Momentum vs. S&P 500 Annual Returns


USA Momentum vs. S&P 500 Cumulative Returns


It looks like the Momentum Index is highly correlated with the S&P 500 index and for a little bit more volatility, investors end up with quite a bit of excess returns. Does it make sense to swap out the staid old market-cap weighted SPY with MTUM?

Of GURUs and MOATs

If we had to point to one financial innovation that upended classical asset management over the last decade, it would be Exchange Traded Funds (ETFs.) At first, there were a handful of them. They were pure market cap weighted funds that mirrored a popular broad market index, the S&P 500 index for example. But over the last decade, the number of ETFs and the strategies they allow investors to access have exploded. Currently, there are over 2,200 ETFs listed in the US. Most of them are cap-weighted, some are “smart-beta”, some are traditional momentum/value, etc. But there are a few of them that are completely bonkers. Here are two of them.


Hedge funds, in the US, are supposed to disclose their holdings that cross a certain threshold to the SEC. The GURU ETF parses those filings and creates a portfolio of “highest conviction” ideas. From its website:

GURU allows everyday investors to access the high conviction investments of some of the largest, most sophisticated hedge funds in the world. Traditionally, investing with a hedge fund requires paying an ongoing 2% management fee and 20% of profits. GURU has an expense ratio of 0.75%, potentially allowing for greater cost efficiency, while providing access to hedge fund ideas.

On the face of it, it is a ridiculous idea. Hedge funds are much more than just long-only equity. Besides, the filings are done months after those funds have built a position in those stocks. So surely, it should be a disaster?

Compared to the broad-market Russell 1000 ETF from Vanguard, it is not so bad. Annualized returns for GURU and VONE were 12.09% and 13.40%, respectively. It seems to have out-performed initially then suffered a deep drawdown from which it staged a middling recovery. Is it a case of the rising tide of a bull market lifting all boats? Can’t say.

We still don’t like the idea but turns out that it was not a very bad one.


All value investors ever want are “attractively priced companies with sustainable competitive advantages.” MOAT promises that for 48bps. Surely, it can’t be that obvious?

Annualized returns for MOAT and VONE were 12.73% and 11.67%, respectively. Back in May 2018, Elon Musk thought “moats are lame.” Not so lame, it turns out.


There are strong reasons for Indian investors to open a US brokerage account and diversify their holdings into dollar assets. ETFs in the US are cheap and cover a wide array of investment strategies – there are at least two for every one that you can think of. Make you move now!

Charts above were created using our Compare Tool. Check it out.