Must know: Choosing or avoiding ETFs based on their performance

Market Realist

Head-to-head: A comparative analysis of bond ETFs (Part 4 of 4)

(Continued from Part 3)

The best performing ETFs

We will now take a look at the three major ETFs we have considered when compared to SPY. First, let us look at the absolute returns and absolute risks, and then we will compare how the result changes when we apply relative measure through Sharpe ratio (SR). We noted that among ETFs, TLT has produced the best absolute return for the three-year period (9.39%). For a period of five years, HYG tops the list (13.44%), while for ten years, TLT again moves ahead (6.15%). Also note that TLT has produced a negative return of 6.15% in the past one year.

Time Period Highest Absolute Returns Lowest Standard Deviation Best Sharpe Ratio SPY Sharpe Ratio
3 years TLT LQD LQD (1.12) 1.06
5 years HYG LQD LQD (1.14) 1.20
10 years TLT LQD LQD (0.25) 0.23

Let us also look at the relative measure and do a comparison. Evidently, LQD has performed better than HYG and TLT with higher SR scores for the three-year, five-year, and ten-year periods. It has even outperformed SPY, the broader index, for the three-year and ten-year periods. SPY has produced the highest return-to-risk ratio in the five-year period.

We still have to keep in mind that this conclusion is based purely on the risk-return trade-off of the ETFs. The past relative performance is not an indication of the future performance.

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