Best ETF Performance
by Return, Volatility and Risk-Adjusted Gain
by Return, Volatility and Risk-Adjusted Gain
The next step is to examine the top contenders in terms of growth as well as risk. For a balanced view of performance, the period of evaluation should cover a stretch in which the market has experienced a boom as well as a bust. The index funds can then be compared in terms of the return on investment along with the level of volatility.
Another vital feature involves a compound measure of risk-adjusted return that takes into account the overall payoff as well as the usual level of turbulence in the interim. These factors are examined for the top index funds dealing with Canada, Mexico and the US; namely, EWC, EWW and SPY.
Performance of Exchange Traded Funds
To obtain a rounded view of performance, an investment vehicle has to be assessed over a longish period that includes at least one upsurge and one blowup of the market. For this purpose, a suitable stretch lies in the interval of five years ending in January 31, 2012. This window covers the blowups of the stock market in 2008 as well as 2011, along with the recovery of the bourse after each meltdown.
A compact tally of performance is given in the table below. The return on investment refers to the average annual gain over 5 years ending on January 31, 2012.
The data has been procured from Yahoo Finance (quote.yahoo.com), the most popular portal for investors on the information highway.
In the exhibit above, the column for the return on investment is colored mostly in green in order to reflect the fact that higher numbers denote better performance. The same is true for the last column, which displays a measure of risk-adjusted return known as the Sharpe ratio.
By contrast, the column for the beta level has been shaded in a ruddy hue in view of its unsettling impact on a portfolio. Admittedly, a high value of beta might be useful for a short-term speculator. On the other hand, lower values are preferable to higher ones for the bulk of actors in their role as genuine investors in the marketplace.
Within each column, the cell containing the best result is shaded in a golden hue. The chosen figure is the lowest value in the context of the beta factor, and the highest level for each of the other two performance measures.
According to the table above, Mexico turned in the best performance in terms of absolute gains. The average return on investment for EWW came out to 0.71 percent on an annual basis.
By contrast, the variability of returns over this period was lowest for SPY, which clocked a beta value of 0.99. We should keep in mind that the function of the exchange traded fund is to track the S&P index, which serves as the flagship benchmark for the U.S. stock market as a whole.
If the correspondence between the movements of the index fund and the target benchmark had been perfect, then the value of beta would have come out to 1.00. Despite the small discrepancy, though, the actual value of 0.99 was close enough to unity to fill the bill for the mass of investors.
In addition to its performance by way of overall gains, the index fund for Mexico also outpaced its rivals in terms of risk-adjusted returns by sporting a Sharpe ratio of 0.25. The latter number indicates that the average return came out to one-quarter of one percent for every percentage point of instability in the sequence of returns.
Meanwhile, the index fund for Canada also turned in a respectable showing in this area. In particular, the risky gain of 0.24 for EWC was nearly as high as the winning value of 0.25 by its Mexican rival.
Graphic View of Performance
A graphic display of the price action can provide an intuitive grasp of the marketplace. For this reason, a standard tool of financial analysis is a chart that compares the relative performance of the top candidates under consideration.
The exhibit below has been adapted from MSN Money (money.msn.com). The display shows the relative movement of the index funds over the course of five years ending in early 2012.
The trajectory of the index fund for USA – namely, SPY – has been sketched out in purple. Meanwhile, the corresponding path for Canada is rendered in blue while the trace for Mexico is painted in green.
In line with earlier remarks, the purpose of the S&P benchmark is to track the stocks of 500 large firms listed on the U.S. bourse. Each company covered by the index is a colossus of the real economy. Due to the size and stability of the outfits, the stocks within the benchmark tend to be more demure than the bulk of equities in the stock market.
For this reason, the S&P index is apt to be less flighty than the corresponding yardsticks for the other countries. In that case, the same pattern should apply to their respective index funds.
Not surprisingly, SPY turned out to be the least volatile of the three funds. By contrast, EWC was the most jittery while EWW was somewhat less so.
Over the span of 5 years covered by the chart, the payoff for EWW usually trailed behind that for EWC. Even so, the Mexican fund pulled slightly ahead of its northern rival toward the end of the stretch.
In this way, the diagram reflects the fact that EWW was the winning fund over the course of half a decade. From the chart, another plausible result involves the advantage of the Mexican fund over the Canadian pool on the basis of risk-adjusted payoff.
On the other hand, the lead in terms of risky growth enjoyed by EWW is far from obvious based on the graphic display. In this respect, at least, the numeric output given earlier provides more clarity than the visual layout. In particular, the Sharpe value for the Mexican fund was a tad higher than the corresponding figure for its Canadian rival.
Further Information
In sizing up an asset for investment in any field, the prospective return has to be weighed against the risk entailed. The crucial factors to consider are surveyed in the section on Financial Risk at MintKit Core: http://www.mintkit.com/risk.
A primer titled “How to Invest in Exchange Traded Funds” gives the lowdown on growth and risk for exchange traded funds. The review also applies the general guidelines to a case study of index funds for the emerging markets of Brazil, China, India and Russia – http://w.mintkit.com/2012/02/how-to-invest-in-exchange-traded-funds.html.
The data available on exchange traded funds is often patchy, faulty and/or misleading. The stumbling blocks, along with defensive moves for the wary investor, are discussed in an article on “Cruddy Information on Exchange Traded Funds” under the section on Investment Funds at MintKit: http://www.mintkit.com/investment-funds.
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