Experiment: How to collect the Global Shares index using Finex funds?

We have repeatedly asked how to construct the «global shares» index using ETF, which are available to the Russian investor. Let’s try to make such a portfolio from Finex funds and compare the results.

Short disclaimer: Our experiment uses historical data and is not an investment recommendation. Past results do not guarantee future return. With a complete disclaimer you can familiarize yourself

To begin with, let’s determine which countries we need. Classic Sample Global Shares Index —

What country tools have investors in ETF in Russia? Their seven:

As we see, investors already have a ready-made solution — the Global FXWO Fund, the index of which has a high correlation with MSCI ACWI INDEX, over the past 3 years it amounted to 0.97! Compare their indicators.

Comparison Index Indicators MSCI ACWI and Solactive Global Equity Large Cap Select NTR Index from May 10, 2017, USD

From the beginning of the publication of data on the Solactive index, followed by the FXWO, MSCI ACWI Foundation in profitability at higher volatility and deep drawdowns. The Sharpe coefficient showing how additional profitability compensates for the risk, turned out to be higher at the FXWO base index. That is, the choice in favor of FXWO would be more rational than using tools on MSCI ACWI or attempts to collect a global index with hand from country bricks.

Is it possible to improve the result due to the combination of other Finex ETF funds? For this experiment, we use funds in the USA, China, Germany and developed markets without the United States.

Based on the share that the United States occupies in world capitalization, it is obvious that the FXUS Foundation will be held in our experimental portfolio. We also use FXDM for «coverage» of countries such as Japan, United Kingdom, France, Canada, Switzerland and others. As a «proxy» for emerging markets, you can use a basket from FXCN and FXRL funds — the first is an excellent example of the manufacturer of finite goods (FXCN), and the second — raw materials (FXRL).

MSCI ACWI Index Shares

A source:

Let’s try to repeat on historical data the MSCI index using a combination of four funds — FXUS, FXDM, FXRL and FXCN. We will use the time horizon in 7 and a half years (from the moment the FXCN Foundation is launched), the MSCI ACWI weight coefficients at the end of October 2021 without regular rebalancing. Developing markets divide into two categories — exporters of raw materials (Eastern Europe, South America, Middle East) and finite goods (Asia).

Comparison of Experimental Portfolio and MSCI ACWI Indicators without rebalancing

The results were dual. On the one hand, the yield of our portfolio is much higher than the MSCI ACWI index, on the other, the key portfolio indicators differ significantly. The crucial role in this, most likely played the weight coefficients of the selected funds and the absence of rebalances. In 7 and a half years, US shares rose more than the others, which led to other weights at the end of the experiment. Thus, the initial weight of the US market in 59.6% increased to 71%, which provided a greater yield and award for the risk of our portfolio with the BUY-AND-HOLD strategy (investment strategy without portfolio overbabs in response to market dynamics).

Comparison of the speakers of the experimental portfolio and index

Source: Bloomberg, Finex calculations

Despite the unsuccessful attempt to repeat the index, you can make two important outputs.

Complete experiment and inclusion in our portfolio regular overbalances in accordance with the historical distribution of scales in the MSCI ACWI INDEX. For this

We use the MSCI ACWI weights, which were observed in 2014 — then the US weight was 10% lower than the current, China’s share was twice as smaller, and 3% was given to the German market in the global distribution.

To repeat past weights, add the FXDE to replication. With new introductory and quarterly rebalanses, the indicators of our portfolio will be closer to the benchmark — the MSCI ACWI global shares index.

Comparison of experimental portfolio and MSCI ACWI indicators with rebalancing

Comparison of the speakers of the experimental portfolio and index

Despite the fact that the risk of the portfolio is already very close to the risk of MSCI ACWI (14.1% against 13.9%), the yield is still above — by 19.1%. Interestingly, with such a weight distribution and quarterly decomposition rebalance, a portfolio from Finex funds are 1% lower than that of the MSCI ACWI index. Thanks to a significant difference in yields and the close risk level, the ratios and yield ratios — Sharpe and Sortino — the portfolio from Finex ETF funds will be higher.

To achieve this goal, we optimize weight taking into account quarterly rebalanses. Here is what the portfolio structure is aimed at the as close to the repetition of the MSCI ACWI index:

In our portfolio, the concentration of the United States is less than in the original index, but the overall displacement in favor of developed markets is preserved.

Weight distribution of the final portfolio

If in 2014, the investor formed a portfolio with such distribution by country and conducted a quarterly rebalancing, he could repeat the MSCI ACWI index with very high accuracy.

Dynamics of the final result of the experiment

Comparison of the final results of the experiment

The experiment was carried out on historical data and cannot predict the future. However, the portfolio compiled in 2014 from 40.5% FXDM, 31% FXUS, 10% FXDE, 9.5% FXCN and 9% FXRL and rebalantly each quarter was able to repeat the MSCI ACWI index with high accuracy over all analyzed parameters. This confirms the fact that the Russian investor has enough tools to keep track of ACWI even more precisely — for this it is not necessary to use ETF, which are traded in foreign exchanges.

Recall that even a more convenient way to buy the «whole world» is to invest in FXWO and FXRW. In addition, in the future, the investor can repeat the MSCI ACWI portfolio using the Foundation for emerging markets, but about it — in the following publications;)

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