ETF Performance: Why do we see a renewed appetite for riskier assets?

Market Realist

First Bridge ETF landscape & risk report (Part 5 of 6)

(Continued from Part 4)

A Renewed Appetite for Riskier Assets

If we look at YTD performance through end November, it is clear that investors who took on equity risk have been rewarded. For e.g.

  • US equity ETFs have had a strong year (SPY up 25%), with US small cap ETFs in particular doing well (e.g. IWM up 32%).
  • Specific developed market ETFs like Wisdom Tree Japan Hedged (DXJ up 33%), iShares MSCI Finland (EFNL up 34%) and iShares MSCI Ireland (EIRL up 41%) have also done well.
  • Some emerging market country ETFs have also performed well e.g. PowerShares Golden Dragon China (PGJ, up 51%) which has significant exposure to the tech sector.

However such a performance assessment must be done with caution. First, a lookback by definition is always 20/20. Second, in such bull markets, ETF analysts run the risk of talking about returns without a corresponding attention to risk.

Data for 10 year period Nov 30, 2003 – Nov 29, 2013

It is important to place this year’s winners in a longer term context i.e. ETFs showing high returns this year are also those asset classes that have historically had the highest risk. The chart below plots annualized returns vs. annualized standard deviation for ETFs representing key asset classes, for the trailing 10 years. Since many country ETFs have been trading only for a few years, EFA and EEM are used to represent the developed equity and emerging equity asset classes respectively.

 

We see a similar pattern in the US Sector SPDRs, where traditionally more volatile sectors have performed better relative to lower beta sectors as one may expect in an extended bull market. For example, XLF (Financials Sector SPDR) has outperformed XLP (Consumer Staples Sector SPDR), with a YTD total return of 29% vs. 22% respectively. However, the financial sector has had to claw back from significant drawdowns in the ’07-09 period. Consequently if we take a longer term (10 year) view, we see that XLF has actually had a marginally negative annualized total return over the period.

Continue to Part 6

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