Practical Applications of Returning to the Silk Road: Should Global Portfolios Replace BRICS?

Practical Applications Summary

In Returning to the Silk Road: Should Global Portfolios Replace BRICS? from the Spring 2018 issue of The Journal of Index Investing, author Sulaiman Al-Abduljader (of Gulf University for Science and Technology in Hawally, Kuwait) examines the BRICS international economic association—Brazil, Russia, India, China, and South Africa. Studies show that BRICS is not a cohesive economic bloc, but instead a “loose club,” most of whose economic benefits flow to China and India—and research has shown that BRICS ETFs do not provide significant diversification to investors. Therefore, Al-Abduljader proposes an alternative bloc to BRICS: the nations linked by China’s new Belt and Road Initiative, also known as the New Silk Road. He posits that these “SILK” nations could provide better investment opportunities than BRICS, and he tests his hypothesis by forming ETFs from different mixes of SILK countries—including Indonesia, Malaysia, Turkey, the Gulf Cooperation Council, Russia, India, and China. He finds that SILK ETFs outperform BRICS ETFs, are better diversified, and provide better overall diversification in portfolios with developed-market ETFs. Bearing in mind ethical concerns about investing in an economic bloc focused on China, financial professionals should consider SILK or other alternatives to BRICS when constructing portfolios.

TOPICS: Exchange-traded funds and applications, portfolio construction, emerging