Bond ETF Year To Date Total Return

Jun 22, 2010 in Total Return

True leadership in bond ETF segments continues as new 6-month highs today in a number of key bond indexes. You must understand total return in order to properly understand this as price charts through standard websites do not track the total return of the indexes. New 3 & 6-month highs among many major bond ETFs -- here are two:



ETFreplay continues to work hard on new functionality and will continue to release new products so check back in. In the meantime, we have listened to users requests and have made a number of enhancements such as:

* Much improved printing in the charts and tables (on ETF Charts, note the user 'control' at bottom of page -- a check box option -- to set up page for printing with white background - it prints quite nicely).

* The moving average backtest now has choice of either daily or monthly moving average.

* We have updated the video for the Relative Strength Backtest page


If you have any comments or requests, use the Contact Form to send us a message.


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ETF rotation made easier to view and analyze with new ETF App

Jun 13, 2010 in Relative Strength | Video

ETF rotation is the focus of this video -  showing how our portfolio ranks summary 'app' Portfolio Screener Ranks-- can be used as an easy way to visualize leadership in custom ETF lists created by the user.

This video shows this new functionality by using recent news involving Bill Gross of Pimco and how relative strength LEADS the news.


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ETF Relative Strength Update:

Jun 04, 2010 in Relative Strength

US equities had led all asset classes for many months headed into late April. When global volatility picked up on the problems in Europe, this caused global equity correlations to rise. Since rising volatility is a negative contributor to expected equity returns, we forecasted a move down in the relative strength rankings for US equities relative to bonds and gold.

We highlighted a move to gold that triggered in our Relative Strength Application at the end of April. Gold has already shown its worth as gold had a positive return in May of +3% (+1100 basis points vs S&P 500) despite possible deflationary conditions in the Eurozone.

Our ETF Screener models tell us how money is flowing and US Treasury bond ETFs continue to lead the ETF relative strength rankings and are attractive on pullbacks. Because long-duration treasuries are quite volatile and don’t offer much yield, we prefer the 3-10 year treasury maturities. The chance of a large drawdown with an average duration in the 5-7 year range is quite low because of the very structure of intermediate bonds. We can look at history as a guide on this and see that while there were very large drawdowns in long-dated treasuries during the 2009 bond-market correction, the mid-term treasuries were significantly safer. So while a continued ‘flight-to-safety’ trade benefits long-duration treasuries most, we think investors should always consider risk in relation to return. And so for risk reasons, our preference is for intermediate treasury ETFs (for example IEI, IEF, BND).

This is a common situation ETF investors should get used to --- where you can like an area of the marketplace but choose to simply avoid the highest volatility ETF’s within that segment in order to control portfolio risk and target Sharpe Ratio (risk-adjusted returns).

Controlling drawdowns is a significant aspect to money management and is a primary reason we created ETFreplay. The very first application we built was a portfolio management module in order to help investors understand volatility and that implication for drawdowns. Remember this basic rule: the higher the volatility, the higher the drawdown.

On the negative side of the ETF Screener models, global forces have continued to aggressively sell equities. As seen below, the broad FTSE All-World Ex-US ETF (VEU) has so far experienced an -18.8% high to low drawdown over the last 6 weeks.



Summary: risk budgeting is a very important aspect to portfolio management . For sophisticated investors, discussing return without the context of risk is meaningless. Our backtest portfolio app allows users to simulate risk budgets by entering ETF weightings and viewing various market segments (as represented in ETFs) relative to some common major benchmarks, whose properties are well understood.



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Examining The Important Link Between Volatility and Drawdown

Jun 01, 2010 in Drawdown | Volatility

You hear the term ‘volatility’ thrown around a lot but it is really not well understood outside of the options market community.  Ask people outside the options community how to calculate volatility and they will likely stutter (including professional advisors).  

Using a chart in combination with volatility can visually show the important link between volatility and ‘drawdown.’  This chart looks at a simple comparison between the Barclays Aggregate Bond Index, the S&P 500 and the ProShares 2x Leveraged Long S&P 500 ETF.

ETF Charts

In this case, we know that the ProShares fund has exactly 2x the daily volatility of the S&P by design and so we expect it to have 2x the daily volatility, by definition (excluding tracking error and any expense ratio differences – which are usually trivial).    

But we would like to take this one step further -- as you observe various indexes, you can and should use the relative volatility of any ETF as a general guide to how much it may lose relative to the market in a correction.  It’s not that the precise historical volatility figure will predict the future volatility, it won’t.   But the historical volatility will offer a very good estimate of the RELATIVE size of a correction vs something like the S&P 500.

It’s a good rule to remember: the higher the volatility, the higher the drawdown.   If you buy and hold the most volatile ETFs, it’s just a matter of time before you will face a significant drawdown.   

Below is a chart that replaces the ProShares 2x ETF with an unlevered fund:  the very popular Brazil fund (EWZ).   

ETF Charts

Note the extremely high relative volatility --- and the larger drawdown.  If I graph volatility historically, you will see that in every observed instance, EWZ is materially more volatile than the S&P 500.   This does not by itself make EWZ unattractive – it depends on your return forecast for EWZ.   Should your return forecast for EWZ justify the increased volatility, then this is good news -- you would own it.

Summary:  the securities with the highest marginal contribution to portfolio risk should provide the highest expected returns.  This entirely logical concept tells the portfolio manager if their portfolio positioning is consistent with their own beliefs.



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