[Proposal] International Index mAsset (mACWI, a global version of mSPY)

TL;DR: Gauging community interest on adding mACWI (All Country World Index Fund) and/or mSPG1200 (S&P 1200). These mirrored assets would track well-established global/international indexes similar to the existing mSPY, which is U.S. only.

mACWI:

mSPG1200:

More info/impact analysis:

Following the precedence set by the recent mirrored SPY (Mirror) and its success (>$10M liquidity), I noticed interest and a few discussions for a globalized index fund asset without any proposal properly fleshed out. Terra is not U.S. based, so the obsession with U.S. equities is actually surprising to me, and I think the community would benefit from exposure to the global set.

Napkin estimates of various index fund providers shows that international indices comprise a significant fraction of total ownership compared to U.S. funds, even within the United States. For example from Vanguard, VTIAX/VTSAX ownership is ~25%, representing a large enough potential liquidity to sustain itself in Mirror based on mSPY adoption.

In my opinion, the major value proposition of adding a global index fund asset is Terra/Mirror could possibly exist in the far future, while the United States is not likely to be the global hegemon for the rest of eternity. If I want to lock up assets on a long timescale in Terra and keep them well diversified against all odds, such as for a retirement account, this becomes important. Other use cases for a universal and persisting mirrored asset (more likely to last for decades than individual assets) could eventually include a recurring-smart-contract (doesn’t exist yet) that pulls a safe withdrawal rate from such a asset, like a dynasty or perpetual care fund, or even just an annuity.

A major challenge is in index selection. The global index should include all countries in an unbiased way, e.g. looking at the market cap of all possible equities without limiting selection to any country. Unfortunately a golden standard international index certainly doesn’t exist yet in the same way that the SP500 is a popular standard for US markets, and changes frequently. Still there is a need for international mirrored assets at the current time, and the best index today could still last years or decades until such a golden standard is universally adopted.

The best global index is probably the MSCI ACWI, e.g. Morgan Stanley Capital International’s All Country World Index Fund. Launched on Jan 01, 2001, as of 2021 it covers ~3,000 securities across large and mid-cap size segments and across style and sector segments in ~50 developed and emerging markets, representing ~85% of the global investable equity opportunity set. Its methodology seems to account for including as many securities as is reasonably necessary or feasible, and is widely adopted enough. However, unlike the simpler SP500 or SP1200 indices, MSCI has more power to change their complex methodology as they please, so in order to satisfy the likelihood of the asset keeping up with the vicissitudes of time over decades, the proposal may deter the uber libertarian segment of Mirror users.

Another option that may appeal to Mirror users is the S&P Global 1200 index, established Sep 30, 1999, which includes ~30 countries ~70 percent of the global stock market capitalization. In my opinion it uses a strange but simple methodology of combining specific regional indexes such as the SP500, SP Asia 50, etc. It does not include the top 1200 securities by market cap regardless of who happens to be the global hegemon at the current moment, as do the MSCI indices. Advantages include the fact that the underlying segments are easier to understand, and less likely to be modified by S&P, e.g. less dependency on institutional needs.

Other less ideal options I’m aware of:

  • MSCI ACWI IMI or All-Cap Index, the latter of which covers 14,000 securities including small and micro cap, essentially an attempt at covering as much of the world as possible. Unfortunately the index is currently only calculated once daily, and not obviously adopted in any popular ETF. There could be liquidity/drift problems with Mirror protocol for a once-a-day index, although I imagine once this is widely adopted, it will supersede the MSCI ACWI.
  • MSCI World Index, calculated since ~1969, includes ~1,500 securities from ~20 countries, notably excluding emerging markets. Older, but less representative of the entire world.
  • Individual funds per country, dozens of which would all compete for precious liquidity and governance support.
  • ex-US funds, which would not compete for mSPY liquidity in theory, at the dire expense of the new fund’s liquidity.

There are some obvious existential risks in getting the asset off the ground (e.g. avoiding total liquidation). There is likely a smaller current interest from the existing Mirror user base, given that all or nearly all existing mAssets are U.S. based. There will likely be a lower trading volume for global index fund assets, as they are often perceived as long-term stable assets, which may not sustain overall liquidity. Interest and investment is not likely to be from fiat/establishment in the short-term, but perniciously scalped from the existing mSPY fund.

But I feel the addition is inevitable, and fantasize about moving retirement funds into a decentralized holder with 0% management fees, which beats any established mutual fund company by a longshot. The proposed asset could be just one more Lehman-brothers-incident away from massive adoption :smiley: .

(Formal Mirror poll in progress pending community interest - I may create a poll for both mACWI and mSPG1200 depending on general feedback).

3 Likes

Hi Justin,
I think this is a great idea, i’ve been regularly buying DCAing into the ACWI and i’d love to switch this to mirror to gain the additional opportunity for staking (+tax positive tax implications).
I would very much vote in favour of this, I do wonder whether it’d be worth waiting for v2, so ppl are more incentivised to vote by the new staking rewards, as I worry this will not get sufficient traction otherwise…

I’d think you’d be better off going the route of Developed ex-US and Emerging Markets. You can look at ETF AUMs and you’ll see that splitting the assets along those lines is much more popular with investors than doing a global market cap weighting of stocks. The ishares ACWI ETF is relatively small in the scheme of international equity ETFs and has a high management fee. Both of which make it less attractive to use as the source for a masset.

I’d love to put my international equity basket exposure into mirror, but ACWI isn’t going to be compelling enough for me to do so because it doesn’t give me enough flexibility in my allocation.

I’d rather see:
VEA+VWO or EAFE+EMG
if you wanted to go the combine dev+emerging then I’d go with VXUS. It alone is 20x the size of the ACWI ETF and cuts 25bps of management fee drag

Good point, it’s a good idea to let this sit a while to gather traction and ideas from the community and until v2 is pushed and there is obvious and sufficient interest. International index funds are obviously in demand, but implementation is a bit complex and without the new v2 voting incentive this will certainly not pass at the current time. I will keep an eye on the v2 timeline and create a poll as soon as it’s complete (or at least the voting incentive is implemented) if no one does so first.

You bring up a very good point. For ACWI, not only is iShares managed by BlackRock with a management fee, but MSCI seems to charge for direct access to its indices anyways, which likely won’t work well with an Oracle. The institutional aspect is antithetical to Terra’s decentralization. I can’t change the description, but would probably focus on the mSPG1200 fund over mACWI. Note the Vanguard funds you mention have the same problem here - if Vanguard raised its management fee by a few fractions of a percent, the same argument would apply. Note that even being a biased boglehead myself, I would not prefer investing in an institutional-based fund in a decentralized mirror fund - why not just open a Vanguard Brokerage in that case? The size/popularity of the funds is not an adequate argument (except for the comparison I made previously, where I intended to demonstrate general interest as a rationale and estimate for scalping liquidity from the other assets); we should ideally be tracking indices, not other brokerages.

As mentioned, ex-US funds seem very US-centric to me, which excludes international investors from having the same flexibility as you. The US focus is, again, strange. What makes it different from using a South Korea and ex-South Korea fund instead? Besides, just the S&P 1200 will allow you to have some flexibility. Unless you plan to hold more international funds by weight than US funds, you can achieve it with a balance of S&P 1200 + S&P 500. I think overweighting international-only funds would not be a common investment strategy, while overall international diversification would be.

Thus I think the best approach is probably starting with the S&P 1200, which will likely be the most commonly sought after international fund (and most likely to pass a proposal). If successful, the individual indices can be proposed to allow investors in any major economic region to decide what split they prefer, for full flexibility. These are less likely to pass, being so fragmented. This includes:

And eventually maybe even similar regional indices like S&P Africa 40.

1 Like
  1. Not all indices have reliable live pricing and licensing index data can be very complicated and expensive, which may complicate having an Oracle. It gets even more complicated because Mirror really needs to use the Total Return Index, not the commonly quoted Price Index. This would solve the dividend problem of massets, but people would look at the SP500TR masset and see the price is nothing like the SP500 price on Google.

  2. ETFs are tradable proxies for the index that will reflect actual current market conditions on the underlying basket of stocks, if you choose one that is very liquid. Hence, the size argument.

  3. How is a Vanguard or Blackrock fund based on a published index any less decentralized than an index defined and published by S&P? S&P derives revenue from licensing and streaming data and they’re all for-profit entities.

  4. The “why not open a brokerage account?” applies for every masset

  5. The size of ETFs is a direct reflection of investor demand for the index, which is a very good proxy for potential Mirror customer demand too. Constructing portfolios using US + Developed ex-US + Emerging is way more popular than having a single Market Cap weighted global fund. Using 3 funds gives investors a lot more flexibility in choosing their exposure than a single take-it-or-leave it All World index.

I agree it would be nice to have all the regional sub-indices, but until the liquidity dilution problem of the automated market maker is resolved, then Mirror just can’t tolerate having so many mAssets. It probably needs to take a page from UniV3 and concentrate liquidity over tighter price ranges and change MIR distribution logic.

Good points brought up:

  1. The S&P 1200 index seems like it’s reliable enough to track directly now and in the near future, as I can easily find multiple price listings that all agree. I disagree in using the total return index because it’s less feasible to construct in reality due to taxation concerns. Mirrored assets that could be constructed with real assets should have less liquidity risk, as they are more likely to match the real pace of liquidity pool growth. An exaggerated example would be a trillion-x leveraged equity mirror; a small upward movement in the price could require a liquidity that surpasses the entire world’s wealth. The total return index slightly outpaces what is possible for liquidity providers in their real investment accounts, which means their real liquidity providing capacity could drift with respect to the underlying index. Regardless, the actual dividend reinvestment (e.g. less taxes) should be accounted for in the plain price index, as price increases indirectly during any additional investment, including reinvestment. Its greater simplicity is a theoretical advantage in oracle tracking due to being more ubiquitous.
  2. Excellent point, tracking actual market conditions is an undeniable advantage. I mentioned above the problem of liquidity provider real asset drift with respect to the liquidity requirements. I’m more worried about what happens when Vanguard/Blackrock ETFs have better alternatives, and what it means to spread liquidity across hyper-specific funds that can change frequently. Even the VEA/VWO have tracked different underlying indices over their existence, implying that Vanguard has essentially complete control over a VEA/VWO mirrored asset price, representing a serious centralization risk (what could they do if mVEA/mVWO far outcompeted their ETF?). Adding a brokerage layer on top of the index layer constitutes additional existential risk for the institutions themselves, which are never too large to fail. As for the difference between the pure index and the actual market conditions, 0-management-cost assets that perfectly track real assets should be what brokerages in the real world strive towards, and it’s possible this will be commonplace in the future, as the current industry trend is a race to the bottom (cost). Maybe a hugely popular mirrored index fund will outcompete traditional brokerage offerings, applying market pressure in this direction.
  3. I’m inclined to agree. The brokerage is an additional layer of risk as mentioned above. Personally I don’t care, but looking at the Mirror userbase and previous threads, I can guess a Vanguard/Blackrock specific fund will not be as popular as an underlying index. For the S&P 1200 specifically, I feel the index methodology is simple enough to evade S&P capitalizing on changing the index; it should always contain 1200 equities from the given indices, which themselves can be calculated by anyone with access to the relevant stock exchanges. It should be possible to calculate even if S&P stopped doing so themselves or restricted licensing. Granted this is not the case with ACWI, and S&P certainly has some profit model that presents a risk.
  4. A trustless decentralized asset holder has many intrinsic advantages over a centralized brokerage, if not just because of far smaller trading costs at the current time, and no management cost.
  5. This point alone could justify creation of ex-US funds at the current time, in addition to a global one. If anything, there is a benefit in the additional trading volume of frequently rebalancing such a setup. It does not appeal to me personally - would I be pretentious to think that that most ordinary investors tinkering with their US/ex-US/Emerging ratios cannot beat performance of a passive globalized asset, or at least not by enough to justify the time cost of their active involvement?

All in all, I would personally prefer mSPG1200 but would vote yes on VEA/VWO or similar if not just to diversify in different mAssets. Liquidity pool aside, there are obviously advantages in all three choices. VEA/VWO would seem less likely to liquidate due to popularity at the current time. Having assets among several mirrored index funds would be the best strategy.

we should really work on a way to reliably track total return INDEX - this would solve the no dividends problems AND you wouldn’t be paying the MER fees of the ETFs.

I’m not aware of a “dividends problem”. Synthetic assets can track anything - the proposal here is for mSPG1200 and mACWI. I could track a function 2^time, and dividends would not be related. I would prefer to track a common index as it’s most likely to match the liquidity pool size a long time from now.