Risk Factors in Investment Planning

 Safeguards Against 
 Obvious as Well as Subtle Dangers 

The financial arena bubbles over with risk of all types. A prime example lies in the smashup of an asset caused by a bombshell in the external environment. Another showcase is the cutdown of a portfolio due to a rash move by a jumpy investor.

One way to classify the slew of threats is to rate them in terms of visibility. In that case, the bogeys span the spectrum from the subtle to the obvious.

Another approach is to gauge the threats according to the level of impact. At low end of the scale is a mild discomfort that leaves no permanent scar. By contrast, the high end of the range involves a mortal blow that wipes out an asset completely.

As a rule, the two traits of severity and visibility are interlinked. In most areas of life, we would expect the major threats to be highly prominent and the minor bugbears to be less so.

In the wacky world of investment, however, the situation is often turned upside down. In that case, a mild menace attracts scads of attention while the mortal danger is all but ignored.

More on Risk Factors.

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Sting of Hedge Funds

Unseen Threats to Investors and 
Proactive Measures by Policymakers 



Over the past few decades, hedge funds have played a growing role in causing or aggravating blowups in the capital markets as well as banking systems. The latest fiasco was the financial crisis of 2008, which ended up crippling the financial complex and slamming the real economy.

The blowup gave rise to the worst recession in more than half a century. The debacle wiped out trillions of dollars from each of the major stock markets round the globe. Another offshoot was the rubout of millions of jobs along with the squelch of trillions of dollars in lost output in the global economy.

The carnage in the marketplace led to widespread calls by the general public for the government to step in and rein in the hedge funds. The targets in the crosshairs ranged from boutique funds standing on their own to coddled groups nestled within commercial banks.

In response to the clangor, governments across the globe scurried to draw up a raft of regulations. To date, though, the hasty response has only served to trammel the financial markets while doing little or nothing to wipe out the threat for real. The lawmakers have taken the facile approach by fiddling with the symptoms rather than dealing with the disease itself.

The roots of the ailment go far beyond the obvious signs of dysfunction. “The crux of the problem lies in the lopsided pattern of reward and penalty”, explains Steven Kim, author of a new book titled Wildcats of Finance. “The enabler is the leverage that comes from financial derivatives and commercial loans. The use of pumped-up schemes allows a tiny band of hedge funds to knock down the entire complex of finance and banking. Another impact is a breakdown of the chains of production and distribution in the real economy.”

Despite the hazards in store, myriads of moneyed investors have hankered after  hedge funds of all stripes. The prospective patrons are lured into the ring by the hazy aura of vast profits swirling round the wildcats.

The image of huge profits is stoked by the crude statistics of the market, which paint a false picture of the profits in store. The pith of the problem is the patchy nature of the data sets, which cover only the pacesetters in the prime of life. The front-runners flaunt their performance when the winds of fortune blow in their favor. Then the fumblers fall by the wayside and slip out of view when the tide flips around and runs in the opposite direction.

According to a number of in-depth studies by credible researchers, the half-life of the most successful players in the field is approximately three years or less. In other words, the fresh-faced investor who traipses into the arena faces even odds that their chosen fund will break down and go kaput within a few years.

Due to the slew of sinkholes in the land of hedge funds, a thorough cleanup of the quagmire will be no mean task. Is a clean sweep of the field even possible?

“It won’t be easy, but it could and should be done”, says the author. “The main hurdle thus far has been the near-total lack of meaty information about the true nature of hedge funds. Another roadblock is the opposition of the lobby groups against any meaningful change in regulations by the government. But there are no barriers at all in terms of technical feasibility, financial logic, or economic sense.”

So what’s the solution? “The lawmakers ought to tackle the crux of the problem and not just tinker round the edges”, says the researcher. “They need to root out the blight at the source rather than clip off a few sickly offshoots here and there.”

What’s keeping the lawgivers from grasping the real problems and taking proper measures? “For one thing, there’s a great deal of misunderstanding about what’s going on in the financial forum. That’s hardly surprising, since the bulk of the data released to investors comes from cherry-picked cases and lead to deceptive results. Then there’s the opposition from the vested interests against any meaningful stroke of regulation.”

For these reasons, a heap of initiative will be required to push through a wholesome set of reforms. In the current state of disinformation and muddling, though, it’s hard to see how lawmakers – along with the investors and voters at large – can muster the strength needed to put things right.

On one hand, legions of investors doubtless nurse a nagging suspicion that there is something rotten in the vale of hedge funds. Yet most people don’t have the concrete facts needed to put their finger on the source of the misgivings.

Part of the problem is that the whole can be less than the sum of the parts. For instance, it’s not obvious to most people how a seemingly benign scheme – such as a quirky form of profit sharing – can give rise to a host of toxic effects. At first glance, the matchup of gains and losses in the hedge fund game, lopsided as it is, appears to align the interests of the operators with those of their customers.

Unfortunately, most folks notice only half of the picture. It’s the other half, which hides in plain sight, that’s overlooked by the investors.
And it’s the hidden part that carries the venom. The impact of the warped setup is to pit the interests of the custodians against those of their clients.

As noted earlier, even the mass of statistics in the marketplace presents a twisted picture of the domain. In that case, it comes as no surprise that investors are unable to reconcile the so-called facts bandied about against the hunches and fears they come to harbor.

Given the custom of using highly biased samples, the reality looks nothing like the mirage of performance painted by the usual run of statistics. The novel book is designed to serve as a basic step in exposing the brass tacks lying behind the golden sheen. The primer debunks the myths, unveils the threats, and presents an agenda for reform.

As a capstone, the book profiles the advantage of sedate investing over frenzied trading in the long run. A related feature is a simple way for the mass of investors to beat the bulk of the competition – in the form of managed pools such as hedge funds as well as individual players such as private investors – without any effort to speak of.

The guidebook is designed mainly for mindful investors focused on nurturing their nest eggs, along with earnest policymakers interested in safeguarding the financial markets and the real economy. Other types of readers range from concerned professionals in the financial community to thoughtful members of the society at large.

Further information on the book is available at the online hub called MintKit Core (www.mintkit.com).

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About the Author

Steven Kim is the founder and head of the MintKit Group, a pioneer in radical innovation and investment strategy. Within the Group, the think tank conducts research on world markets and disseminates the findings through a series of publications. One initiative is an online hub named MintKit Core, which provides information and education on investing in a worldwide economy. The topics in focus span the gamut from market dynamics and financial forecasting to portfolio management and global strategy. The author has counseled and trained self-starters in diverse walks of life, ranging from novice entrepreneurs and senior executives to international investors and public officials.

About MintKit Press

MintKit Press is the publishing arm of the MintKit Group, an innovator in research, information and education on growth in a global marketplace. The programs of research span the spectrum from surveys and analyses to outlooks and guidelines for investing in world markets. While the results are published through a variety of channels, the main hub is a newly built site located at MintKit Core (www.mintkit.com).

Contact Information

A contact form is available at: www.mintkit.com/contact.

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How Forex Affects an ETF for Global Investment

 Showcase of Australia and Korea 

In a global marketplace, the return on investment for an exchange traded fund (ETF) depends in part on the behavior of the foreign exchange (forex) market. Whatever the type of asset, the turnout of the currency in a particular country can have a big impact on the payoff for an international investor. It makes no difference whether the investment involves a financial instrument like a stock or bond, or a tangible object such as land or housing.

Many people have the impression that equities and currencies are independent classes of assets. While that may be true in principle, it’s hardly the case in practice.

For this reason, the global investor has to consider the linkages amongst different types of assets. The forces at work are examined in connection with a couple of stark examples involving Australia and Korea. The case studies happen to involve divergent cultures and distinct time scales, but the crucial patterns crop up regardless.

Bogey of Foreign Exchange

In a global economy, the payoff from an exchange traded fund depends in part on the action in the currency market. The outturn of foreign exchange plays a vital role in boosting or slashing the return on investment. Vivid examples of this sort are found in the markets of Australia and Korea.

At times, the behavior of the currency can outshine or reverse the action in the target market. It makes little difference whether the investment involves a financial instrument like a stock or bond, or a tangible object such as real estate.

The exchange rate adds an additional layer of risk to an international investment. The fortunes of the currencies in the respective countries could uplift the gain or pummel the payoff in a big way.

Linkage of the Currency and Stock Markets

By and large, the local currency moves in tune with the stock market. When the bourse rises, so does the currency; and vice versa.

The linkup between the two markets is spotlighted by the experience of Korea. The chart below, adapted from Bloomberg (bloomberg.com), covers a period of 5 years ending in February 2011.

The orange line shows the relative performance of the Korea Composite Stock Price Index (KOSPI) throughout the stretch. Meanwhile, the value of the currency with respect to the U.S. dollar is depicted by the green curve.

An obvious feature of the chart is the tie-up between the currency and equity markets. Although the behavior varies in detail, both types of assets tend to swell and swoon in unison.

Another blatant trait involves the difference in the size of the swings. In particular, the bourse is seen to be a lot more volatile than the currency.

Both of the foregoing traits are in fact hallmarks of the financial forum. In other words, the tie-up as well as the divergence of the markets are prone to show up in connection with other countries dotted round the world.

Impact of Forex on an ETF

Another showcase lies in Australia. Here, too, the currency tends to move in tune with the bourse.

The chart below, adapted from the Wall Street Journal (wsj.com), spans a period of 2 years ending in February 2011.

The purple line shows the relative performance of the All Ordinary Shares on the Australian Securities Exchange (XAO). As the chart shows, the benchmark rose by nearly 50% over the entire span.

Meanwhile, the pear color portrays the path of the CurrencyShares Australian Dollar Trust, an index fund whose goal is to track its namesake. The vehicle trades in the U.S. under the ticker symbol of FXA.

Lastly, the green arc depicts the tracking fund in the U.S. called the iShares MSCI Australia Index (EWA). In keeping with its name, the underlying goal of the vehicle is to mirror the action of the XAO.

By contrast to popular perception, the performance of EWA differs greatly from the turnout of the Australian exchange. The reason, of course, is that the index fund is priced in terms of the U.S. dollar. For this reason, the value of EWA depends not only on the fortunes of the stock market down under, but the movements of the southern currency as well.

During the period covered by the chart, the stock market as well as the currency in Australia each rose by roughly 50%. On the other hand, the ETF based in the U.S. surged in excess of 100%.

Naturally, an ETF does not track its target market with perfect accuracy. Even so, the difference in performance is apt to be nominal for an index fund which is constructed and managed in a sensible way.

Given this backdrop, an ETF whose goal is to track a foreign market will in general embody the performance of the target asset as well as the exchange rate. The entanglement can work to the benefit as well as the detriment of the international investor.

Wrap-up of a Double-Edged Sword in Global Investment

The foregoing charts include the stretch in which the global economy was slowly recovering from the financial crisis of 2008. For this reason, the bourse as well as the currency were prone to trudge upward in many countries round the world.

As noted earlier, though, the linkage between equities and currencies can crop up in the downward direction as well. For instance, a cutdown of the stock market in Australia is likely to drag down the local currency in tandem.

Many folks have the impression that stocks and currencies are independent classes of assets. The misconception is spotlighted by the argument that an investor can diversity their portfolios by investing in foreign currencies as well as equity assets. While the argument might be plausible from a conceptual stance, it’s largely flawed from a pragmatic standpoint.

The foregoing examples underscored the fact that distinct classes of assets are intertwined rather than independent. In fact, the action in any market may have a huge impact on the behavior of the others.

An exemplar lies in the role of the exchange rate in fixing the payoff from a stock market located abroad. Due to the forces at work, along with the interactions involved, a lucid program of global investment has to take into account the hefty impact of the forex market on stocks as well as other types of assets.

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Top 10 ETF List for Growth – Performance, Risk and Cost

In order to pick out a promising exchange traded fund (ETF) in an orderly way, the first task of the investor is to compile a list of the top performers. For this purpose, the crucial factors include the pace of capital gains, the level of price volatility, and the burden of maintenance charges.

In certain cases, additional features may come to the fore. A case in point is the yield due to the dividends thrown off by the ETF.

For the most part, the traits noted above are interlinked rather than independent. As an example, an exchange traded fund on a growth streak is apt to be more volatile than a sluggish one which plods along at a modest pace. Another sample is the cost structure; whatever the performance in the past, an index fund with a heavy load is more likely than not in the future to lag behind its rivals with leaner structures.

In tackling these issues, a sensible step is to begin with a muster of the top 10 funds by way of growth. Then the other factors such as risk and cost can be brought to bear on the evaluation.

Top 10 ETF List by Growth

In preparing a roster of the top candidates, an obvious point of departure is the growth rate over the past several years. On a negative note, however, a lot of exchange traded funds are relative newcomers to the financial forum.

For this reason, the sources of information available to the investor might provide tallies of performance for only a few years into the past. A case in point is the section on ETF securities at the Web site maintained by Morningstar (morningstar.com).

The table below displays the exchange traded funds at the forefront of growth. As an example, the last row of the exhibit corresponds to an index fund called the SPDR S&P Pharmaceuticals. The purpose of this ETF is to replicate the total return – consisting of the capital gain plus the dividend yield – of the S&P Pharmaceuticals Select Industry Index.

The fund trades in the U.S. under the ticker symbol of XPH. According to the second entry in the same row, the vehicle deals with the health care segment of the stock market. Based on the last cell, the fund enjoyed an average annual gain of 14.41 percent over the course of 3 years ending in early 2011.

Clustering of Funds

The financial markets as well as the real economy have a way of advancing and retreating in an endless series of waves. The same is true of smaller tracts within the marketplace.

On the other hand, the undulation is far from uniform across the panoply of assets. Rather, certain segments of the market might swell while others shrink, and vice versa. 

From the table above, we can see that four of the funds belong to the technology sector. Meanwhile, the health care segment boasts two pools.

A similar situation applies to the commodities sector as a whole, and the field of precious metals in particular. To be precise, the latter category contains a couple of contenders.

In addition, the market segment dealing with Latin America fields a single entrant. Finally, the category of Mid-Cap Growth rounds up the roster with one candidate.

Quick Scan of the Top ETF List

In reviewing an asset, it’s always helpful to get some idea of the performance under stormy as well as balmy conditions. A case in point is the behavior of a fund in the midst of a crisis, including its turnout during the most recent crackup of the stock market.

The chart below, courtesy of Yahoo Finance (finance.yahoo.com), presents the relative movements of all 10 stocks from the preceding table. The diagram covers a period of 5 years ending in early 2011.

In the midst of this stretch, a watershed lay in the financial crisis that erupted in the autumn of 2008. The impact of the fiasco is apparent in the middle portion of the chart.

One of the stocks can be seen clearly as an abnormal case. The outlier lay in BHH, a fund focused on Internet commerce. The pool suffered a big meltdown at the end of 2007, even before the financial flap erupted the following year.

After the wipeout, BHH began to recover starting in early 2009. Following the severe breakdown more than a year earlier, the fund was getting back on its feet from a low base. Due to the paltry price of the stock, even a modest increase of a few cents could result in a hefty rise on a relative basis.

Given this backdrop, it’s not surprising that BHH should clamber upward at a decent pace in the subsequent years. The fund was merely recovering some of the whopping losses it had suffered before and during 2008.

On the other hand, BHH still has a long way to go on the road to recovery. At this juncture, the price of the stock hovers around a single dollar.

As a rule of thumb, any equity priced under $5 per share is considered to be a penny stock. Moreover, a lot of stocks with such lowish prices tend to be highly volatile. For this reason, myriads of investors refuse to consider penny stocks as serious candidates for long-term investment.

Worse yet, there is an even bigger problem with BHH. Although the fund encompassed a larger batch of stocks in the past, all but two have fallen by the wayside over time. In other words, the pool has come to comprise only a couple of equities at this juncture.

In general, a basic appeal of an ETF is the coverage of numerous equities as a way to spread out the risk of a big smackdown resulting from the wipeout of a single security.  If a fund contains only a couple of stocks, however, the level of diversification is hardly worth talking about.

Given this backdrop, BHH suffers from the stigma of being a penny stock as well as the risk entailed by a dearth of diversification. Due to these flaws, we will forgo any further consideration of the vehicle here. In other words, we reject BHH at this stage as a suitable candidate for investment.

Matchup of Risk and Return

We have already eliminated one of the funds from the original lineup of high flyers. From this point onward, we will take a closer look at the remaining 9 entries in the foregoing table.

PowerShares Dynamic Networking

The second security in the previous table is PXQ. The aim of this fund is to track the Dynamic Networking Intellidex Index, a benchmark that covers several dozen firms ranging from Qualcomm and Cisco to Symantec and Netgear.

For the sake of consistency in comparing the funds, we will rely for the most part on the data provided by Yahoo Finance.

Toward the end of 2010, PXQ issued a small dividend of 10.733 cents per share. Meanwhile, the current price floats in the vicinity of $26.16. The ratio of the latter two figures is about 0.41%.

Suppose that this payout turns out be representative of the annual dividend in future years. Moreover, we will assume that the average gain in price of 18.64% per year seen over the past 3 years will continue to prevail going forward. Based on the last two rates, the total return for the investor would come out to 19.05% per annum.

The net expense for the pool happens to be 0.63% a year based on the current value of the portfolio. In one sense, this figure is only of secondary import to the investor. The reason is that the burden of maintenance fees would be baked into the price of the fund on the open market.

On the other hand, the level of expenses is a measure of the efficiency of the custodians. Other things being equal, a lean pool is likely to perform better over time than a bloated one.

We turn now to the flightiness of the asset. A standard yardstick of volatility is found in a factor called beta, which measures the average jitter of a security compared to the market at large.

Based on the behavior of PXQ over the past 3 years, the value of beta was 1.22. From this figure, we can infer that the stock tends to swell by 1.22% whenever the market at large rises by a single percent. In other words, the security is somewhat more volatile than the market as a whole.

Another way to measure the flightiness of an asset is to determine how much the return on investment varies over time.  As an example, suppose that a stock named Al enjoyed an average gain of 9 percent a year over the past decade, with scant variation in performance from one period to the next.

By contrast, consider an equity named Bo which also managed to rise by 9 percent a year on average over the same time frame. On the other hand, the returns for this asset varied widely from one year to the next.

In general, investors have a penchant for high growth just as they have a distaste for high risk. In comparing Al and Bo, the duo turned in the same performance in terms of the average rate of growth. Yet the risk for Al was lower. As a result, Al would be chosen over Bo on the basis on risk-adjusted returns.

In gauging the dispersion of returns, the usual figure of merit is a yardstick known to statistical wonks as the standard deviation. The latter feature is usually denoted by the Greek letter sigma.

For this reason, we could refer to the standard deviation as the sigma factor. The higher the value of sigma, the greater is the scatter of payoffs. In other words, the risk due to turbulence turns out to be higher.

The standard deviation could be computed from the raw price of the stock in terms of absolute dollars. Another way to approach the subject is to calculate the return on investment from one period to the next, then figure out the standard deviation of the sequence of relative payoffs. 

The latter scheme is the usual procedure adopted by the financial community. Its advantage lies in the ease of comparing the flightiness amongst diverse assets.

As noted earlier, investors are fond of high returns at low risk. One way to combine both these factors into a single yardstick is to divide the average gain by the sigma factor. The latter quotient is known as the Sharpe ratio

The Sharpe value is the usual measure used by financial jocks in gauging the risk-adjusted return. As an example, suppose that the average return on a stock called Cy happened to be 10% per year, while the sigma factor was 20%. In that case, the Sharpe ratio would be to 10/20; or 0.5 in decimal form.

At this stage, we should note that the average dispersion can exceed the average return since a stock can experience large drops into negative territory. For instance, consider a stock named Di which rose by 50% during the first year, then fell by 40% in the second year. Over the 2-year span, the security had an average return of 10%; but the divergence of the payoffs was enormous.

Clearly, a high value for the Sharpe ratio is better for the investor than a lower one. As a baseline for comparison, we invoke the corresponding figure for the most common benchmark of the stock market used by professionals; namely, the S&P 500 index. A fact sheet at Standard & Poor’s (standardandpoors.com) indicates that the Sharpe ratio for the benchmark over the course of 3 years ending in early 2011 was a mite under 0.33.

We turn now to the risk and return for the PXQ fund. For this pool, the Sharpe ratio over the past 3 years was 0.46. The performance appears to be significantly better than the turnout for the S&P 500 index.

Rating the Rest of the ETF List

The remaining stocks from the table above can be scrutinized in a similar fashion. For the sake of brevity, though, we will refrain here from going into every little detail.

Rather, this portion of the article will present an overview of the feasible candidates. In particular, the survey focuses on the range of values for the key properties displayed by the ensemble.

For the muster of 9 funds, the annual charge for maintenance fees varied from 0.35 to 0.63 percent. At the low end of the range were the RFG and XSD pools. The high end of the scale was anchored by PXQ.

The yield due to dividends varied from 0 to 0.91 percent. The funds offering no payout at all were PXQ, FBT, SLV, DBS, and FDN. The most generous yield, such as it was, came from ECH.

Meanwhile, the value of beta varied from 0.66 to 1.31. The low end of the span was taken up by ECH and the high spot by XSD.

Finally, the risk-adjusted gain according to the Shape ratio ranged from 0.27 to 0.75. The laggard was XSD while the leader was DBS. Moreover, SLV deserved an honorable mention with a rating of 0.74.

Index Funds and Raw Commodities

As we saw earlier, an ETF which covers only a couple of stocks is much too narrow to be considered by the majority of investors. Stocks can and do break down for any number of reasons whether or not the firms standing behind the securities happen to operate in thriving markets.

As an example, a fusty business might be trounced by an upstart rival armed with a newfangled product. Meanwhile another hapless firm could succumb to an accounting scandal, a class-action lawsuit, or some other type of mishap.

For these reasons, an index fund ought to cover a sizable selection of firms in order to withstand the meltdown of any single stock without causing the pool as a whole to collapse. In this context, a roster of perhaps 10 members might be viewed as the minimal number needed for adequate protection against the occasional crackup of the elemental securities.

By contrast, the commodity market is more resistant to a total wipeout. A case in point is silver, whose price is determined by the matchup of supply and demand in a global forum. In particular, the demand for silver stems from its use in a host of products ranging from jewelry and ornamentation to utensils and microelectronics.

Granted, the commodity market is subject to a raft of threats as well. An exemplar is a global recession that craters the demand for silver.

On the other hand, the price of the white metal is unlikely to break down completely and flop to zero anytime soon. And even if it did, the market is bound to recover sooner or later.

Thanks to the hardy streak, a commodity can be far more robust than a security issued by a lonesome company. For this reason, an index fund that tracks a natural resource should not be rejected outright for the mere reason that it happens to cover only a single commodity. 

There may be a slew of reasons why a particular fund in the commodity market could be problematic. But the lack of diversification is not necessarily one of them.

For some types of investors, a focused pool in the market for raw materials might be a perfectly fitting choice. The decision could be especially apt if the security were to complement the other holdings within a larger portfolio.

With that matter out of the way, we can get down to the business of comparing a couple of similar funds in the foregoing table. As it happens, two of the pools focus on the market for silver bullion.

Index Funds based on the Commodities and Futures Markets

In the case of the SLV fund, the pool holds a stockpile of silver bullion. By contrast, the DBS vehicle tracks the same market by buying and selling contracts for the white metal on the futures market.

For SLV, the net cost of maintenance came out to 0.50% on an annual basis. The corresponding figure for DBS was 0.54%.

Neither fund gave off any dividends. Moreover, the value of beta for SLV was 0.89 while that for DBS was 0.92.

The foregoing statistics from Yahoo came from a database spanning a period of 3 years ending in late 2010. Judging from the results, DBS was slightly more turbulent than SLV over this period.

From a different angle, the Sharpe ratio for SLV turned out to be 0.74 while that for DBS was 0.75. Apparently, the latter pool enjoyed a slim advantage in terms of risk-adjusted gains.

Another slant on the subject is provided by a research outfit named the RiskMetrics Group (riskmetrics.com). The market watcher gives more weight to newer observations over older ones.

In other words, the behavior of an asset in the recent past counts more than the action that went before. The resulting statistics are published at a site called RiskGrades (riskgrades.com).

The basic trait tracked by the agency is the return on investment from one day to the next. In the next step, the average value of the payoff is calculated while giving a bit more weight to the observation for a particular day compared to the average level obtained from the previous day of trading.

At the next stage, the value of sigma for the target asset is divided by the corresponding figure for a basket of equities traded on a number of stock markets round the world. Finally, the resulting quotient is multiplied by 100 in order to express the outcome as a percentage rather than a fraction.

Put another way, the RiskGrade for a basket of global equities is defined to be 100 units. Moreover, the level of risk for a given asset is presented as a percentage of the reference value.

For a simple example, consider a fund named Fay whose RiskGrade happens to be 150. The latter figure indicates that the pool is 50 percent more flighty than a representative basket of global equities.

Over the course of 3 years ending in early 2011, the average level of risk for SLV was 191. At the end of the stretch, the value of the yardstick came out to 162.

By contrast, the mean level for DBS over the 3-year stretch was 197. Meanwhile, the latest figure stood at 163.

From the foregoing batch of statistics, SLV appears to be a wee bit less volatile than DBS. Moreover, the performance figures in the previous table show that SLV grew a tad more quickly as well.

In view of these results, we can conclude that SLV enjoyed a slight edge over DBS based on the RiskGrade yardstick. One reason for the small gap in performance for the two funds doubtless lay in the distinction between the commodity market and the futures market. According to the statistics, the latter market appeared to be slightly more volatile.

To be precise, the price of each fund was of course determined by the behavior of the investors in the stock market. For this reason, we could be a bit more accurate and say that the difference in performance for SLV and DBS stemmed from the mindset of the participants in the equity market regarding the prospects for the raw commodity versus the outlook for the futures market.

Whatever the cause of the discrepancy, the differences between the two funds were paltry. And that was just as well.

In fact, a sizable gap would have been a cause for concern. After all, from the standpoint of the investor, the ultimate function of both vehicles is to keep up with the market for silver bullion.

Winning Traits

The top 10 funds based on growth featured a medley of traits in terms of risk and cost. Based on the data over a 3-year stretch, the best candidate in each category was as follows.

  • Top Growth: 18.64% a year on average for PXQ
  • Least Risk (Beta): 0.66 for ECH
  • Least Cost: 0.35% a year for XSD and RFG
  • Best Risk-Adjusted Returns (Sharpe): 0.74 or better for SLV and DBS

To sum up, the best performers on a risk-adjusted basis were SLV and DBS. Or we could just say that the winner of the beauty pageant was silver bullion.

Tailored Choice

The procedure presented above can serve as the groundwork for selecting the best fund for a personal portfolio. One important issue that lies beyond the purview of this article is the need for each investor to assess every candidate in light of personal circumstances.

A prime example lies in the tolerance for risk. Another factor is the way in which a pool complements the other assets within a larger portfolio.

Given this backdrop, the best choice of ETF for one person could well be a lousy pick for someone else. For instance, a particular investor might decide that a high rate of growth is not worth the big headache caused by the violent thrashing of prices.

Moreover, the serious investor consults several sources of information in order to obtain a sound and rounded view of the choices under consideration. A case in point is a confirmation of the past statistics as well as the current status of an ETF. Another sample is the long-range outlook for the target market tracked by an index fund.

Whatever the final decision, though, a list of the top 10 performers is a good place to begin the quest for a winning ETF.

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