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

Abstract

The Silk Road has valid historical significance between nations that have conducted trade for centuries. In recent socioeconomic trends, the re-emergence of the New Silk Road is outlined with perceived implications for investment strategies. Investment portfolios of exchange-traded funds (ETFs) resembling the Silk Road nations are constructed to analyze performance and diversification benefits and are benchmarked against the Brazil, Russia, India, China, and South Africa (BRICS) ETF. The results reveal mixed performance: lower correlations with developed markets and an increase in capital inflows, as reflected in ETF subscriptions. Causality testing with developed markets shows a bidirectional causation. Unidirectional causation is also found, running from the Silk Road basket to both BRICS and the MSCI Emerging Market ETF. Moreover, using a hedging approach to investigate effective diversification in a global portfolio, evidence is found of effective international diversification when adding the basket of Silk Road markets. This article puts forward the argument that investors should consider an alternative to BRICS and divert investment attention toward cohesive, frontier economic blocs.

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