Chinese ETF Calendar Year Returns & Drawdowns

Oct 17, 2017 in Drawdown


Link to ETFreplay Subscriber Tool: ETF Calendar Year Max Drawdowns


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Gold ETF: GLD in its 74th Month of Drawdown

Oct 03, 2017 in Drawdown | Gold Follow us on Follow etfreplay on Twitter


Low Drawdowns and High Returns. 2017 thus far has been investment nirvana.

Sep 27, 2017 in Drawdown

[Link to the tool in this blog (members): ETF Max Drawdown ]

Over the past ~15 years, the bond market has generally had positive single-digit returns and also single-digit calendar year drawdowns.  As the gentlemens asset class, bond ETFs generally don't have the anguish associated with the big drawdowns of many equity ETFs.

For a reference point, below is a snapshot of Calendar Year returns and drawdowns for LQD, an investment grade bond ETF:


What is remarkable about this year is the combination of high returns with extremely low drawdown in some traditionally high-vol, high-drawdown segments - such as emerging markets.   2017's max drawdown for emerging markets has actually been less than most BOND market years.



+27% YTD total return near the end of the 3rd quarter of 2017 vs just -3.5% drawdown.   Obviously, strong return and Low volatility leads to high rankings in our Relative Strength models.  Uptrends can have some violent short-lived corrections but investors can manage such volatility by tilting their portfolios away from the weakest segments.


[Link to the tool in this blog (members): ETF Max Drawdown ]

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ETF Volatility Targeting

May 30, 2012 in Drawdown | Volatility

A new book in the Market Wizards series (by author Jack Schwager) has come out this month.  While these books are a collection of interviews of great money managers -- Schwager himself also does a nice job of summarizing some of the themes he personally has gleaned by incorporating his decades of experience into a series of observations.   

He also recently summarized a few of these observations on his twitter account (@jackschwager).  

A few of his takeaways from interviewing top money managers:


* It is not about predicting what will happen -- but rather recognizing what is happening


* Many go wrong by failing to adjust exposures to changing market volatility


This all conveniently ties into ETFreplay, using Relative Strength to help recognize what is happening is foremost.   But on the second point, we recently added a module to help think about how to adjust exposures to changing Market Volatility.  Let's look at one example of the latter.

Let's think about the Russell 2000 Index, the most popular index for small cap U.S. stocks, which is one of many important market segments we can access at ultra low-cost (never any redemption fees or lock-ups with ETFs) and it of course has total transparency and is deeply liquid.

Let's look back at 2010 for an interesting example of how this segment has traded.  

2010 was a very good year -- but you wouldn't have said that during the summer of 2010 when there was a large drawdown following a flash crash in May and yes, continual negative newsflow from... drumroll... Europe.    The final IWM return was very strong +27% but masks the mid-year washout and pain many investors felt.


Here is 2010 as full year snapshot. 

Go forward one year to 2011, the IWM final return of -4% for IWM also greatly masks the 'path-taken.'  Another large drawdown, this time -29% and about the same actually as the European index loss (VGK was off -30% from peak to trough).

This is very important and something that investors must study a great deal --- the long-term return of the markets is not all that great in relation to the often wild path taken to get that return.  That is, a long-term return of say +7% might have huge drawdowns along the way that cause investors to actually end up losing money if they don't learn how to deal with this.    

(In modern portfolio theory terms, you describe this situation (low return relative to high volatility) by saying simply that the Sharpe Ratio is not very good.)   

If the short-term S&P 500 sharpe ratio gets really high, just wait -- it's coming back in at some point.   This is what happened in Q1 2012 when the S&P 500 YTD sharpe ratio was over 3.00 at one point.   We noted this as an unsustainable figure on our Allocations board timeline.   And now we see the inevitable washout that occurs with assets that don't have good long-term sharpe ratios.   If you want a more efficient equity curve, then don't buy and hold stocks --- unless its part of a well thought-out allocation that adjusts to prevailing conditions.

On the Tools page is a new module 'Volatility Target Test.'  This module executes a convenient, clean performance backtesting report for you complete with detailed period-by-period weightings and return.   

It combines any ETF of your choosing (such as IWM) with a cash-like ETF (SHY) and allows you to therefore approximate a level of volatility for the combination based on changing (dynamic) market conditions.  It continually adapts to the current environment and records the performance of such a mechanical targeting approach.

It should be clear that if you target low volatility and the market goes up a lot -- then obviously it will underperform.   But if you target lower volatility and the market goes down a lot, it will obviously then outperform.    The point of the application is not to be an optimal weighting, it is to help us all understand how volatility targeting is working and how to avoid one of Schwagers main points repeated here

* Many go wrong by failing to adjust exposures to changing market volatility

Below is a single view screenshot of the new volatility Tool:

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Understanding ETF Volatility Part 2

Dec 22, 2011 in Drawdown | Volatility

We are updating our 'Volatility vs Subsequent Drawdown' Chart for 2011.   We did a similar post a year ago and you can review that blog post here: Understanding ETF Volatility Part 1.


The way to read these charts is to simply note the relationship.   By definition, high standard deviation investments offer wider opportunities for both out and underperformance.  The S&P 500 dropped -18.6% off its high during 2011 (using closing total return values).   This was -3.2% worse than the mid-year loss in 2010, when the S&P dropped -15.6%.   

Gold had a more normal drawdown in 2011 at -17.5% vs 2010's -7.8%, due mostly to its more aggressive slope up during the summer.   Gold never got particularly volatile in 2010 but in 2011 it traded more typical of a commodity market -- where there is often a momentum-oriented blow-off move.   Still, if you were watching volatility dynamically, you would take note of it becoming riskier during the July-August advance.   

The NASDAQ-100 actually dropped slightly less from high to low in 2011 vs 2010.  Large-cap tech -- particulary AAPL have been relatively calm in 2011 -- which was also the case in 2010.   Can it go 3 years with just a mid-teens drawdown?  We don't know but there are certainly other more attractive segments as we close 2011.

It may sound odd but the losses in both 1) small cap US stocks (IWM) and 2) US Energy stocks (XLE) were about the same from high to low as the European ETF (VGK), which dropped -30%.   However, both of the US ETFs have seen strong rebounds in Q4 and are a few percentage points from flat on the year.

Silver (SLV) is pretty consistently the most volatile (unlevered) ETF around and it didn't disappoint with a -41% high to low move in 2011 (and the year isn't quite over).

Treasury bonds ground out fantatstic years.   We've blogged many times about how intermediate and low-duration bonds are the ultimate safe-haven.   You can't count on consistent correlations in times of crisis -- but you can count on low-duration bonds,  the fixed-maturity dates of the underlying securities ensure it.  This is not true of long-term bonds -- which look susceptible to significant drawdowns in 2012.  As much hype as the US downgrade received, it proved yet another meaningless move by the ratings agencies in the United States, which for some antiquated reasons seem to remain relevant to some.

Note that many ETF providers launched 'minimum volatility' ETFs in 2011.  Since starting in early 2010 we have always used volatility as 1 of 3 key inputs in our multi-factor screener model -- so we are not surprised to see this development from the ETF providers.   Volatility has and always will be important --- but it's certainly not the only thing that matters.  Myopically focusing on volatility is taking this all too far as building ETFs off a singular concept like this is very limiting.  

We view risk-adjusted (volatility-adjusted) relative strength as the cornerstone philosophy of and this led to a fixed-income bias throughout most of 2011.  However, a tactical investment process continually looks to adapt to the environment --- and we would look for continue rotations in 2012 --- and every other year for that matter.   There is plenty of room to add value in any year and it's up to you to figure out which group that is and how to manage it.  In 2011, fixed-income ETF showed excellent total returns.  You can't always be right of course --- but you can pursue a process on thoughtful consideration of which markets to be involved with --- and then layering some trend-following techniques on top of that ---  all the while continually striving to protect yourself for the times you are wrong.   If you simply stay consistently loaded in a group of highly volatile securities -- it is just a matter of time before you have a large drawdown. 

As can be seen in our tracked Portfolio Allocations, we view equities to be attractive as we end 2011 -- particularly small and midcap US stocks.  We see signs of P/E multiple expansion with rates low and liquidity being added to the problem areas of the global economy.  However, even assuming we enter an intermediate uptrend (which may or may not occur), this does not mean that more rotations within the markets won't occur.  It is never easy in the moment and we will carefully continue to watch and adapt to new potential themes/trends --- while always watching our backs to avoid too much portfolio volatility (and its associated drawdown).


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Drawdown Nuances In Backtesting Results

Oct 21, 2011 in Backtest | Drawdown | Video

We have improved the quality of the backtesting applications again.   All backtests will now display the path of returns on a daily basis, regardless of which update schedule you are on.   This allows for more precise chart visual --- and a few supporting statistics have been improved.   The video below explains this -- there is a nuance that we go over that may not be so obvious here:



Also, just a snapshot of a few indices for YTD drawdowns -- the higher the volatility, the higher the drawdown.


See Also: Drawdown Blog Posts

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Understanding ETF Volatility Part 1

Dec 02, 2010 in Drawdown | Volatility

Volatility is a tough topic to get your hands around.    But one key idea is to think in terms of drawdowns  -- in general, the higher the volatility the higher the drawdown.   What does this mean?   It doesn't mean that volatility is just bad --- it means that with funds like the Russia Fund (RSX) or Brazil (EWZ) or Financial stocks (XLF), your TIMING is more important than with something like a consumer staples ETF (XLP) or an investment grade bond fund (CIU).    Since we've posted this many times this year, it's time to take a look at some actual hard data through the first 11 months of 2010.

The chart below compares the known volatility exiting 2009 with the subsequent drawdown in 2010.   We think this shows the basic idea pretty well.   Its certainly not going to be exact --- but in general, it makes sense.   So we can think about this from a higher level to help us.   If our portfolio were 100% long Brazil (EWZ) all year, then the portfolio value would have moved down -24.7% off its high at one point.   You didn't 'lose' -24.7% vs your starting cost   ---   but you did lose a big % off the high.    A goal in portfolio management is to smooth out the ride a bit.  

Note here that this is just one 11-month period of data.  The concept is solid -- but the future will be different.     The S&P 500 had a -15.6% drawdown during this particular period.  Less volatile ETFs all had lower drawdowns. A few on this list that had significantly higher volatilities had lower drawdowns --- but not by much.   This is for concept and its relative.   If the S&P 500 has a larger drawdown next year, then expect these numbers to all be bigger when we do this again next year.


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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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The Higher The Volatility, The Higher The Drawdowns

Apr 22, 2010 in Volatility | Drawdown


Lately I have read in a few places that "investors too often equate risk with volatility." The people who say these kinds of things rarely go on to present an argument based in statistical fact. This blog post is not to say anything is absolute --- but I will show some simple recent data that hardly refutes the statement put forth on the first page of Chapter 3 in ‘the bible’ of quantitative finance ‘Active Portfolio Management’ (Grinold & Kahn, 1999): – it could not be much clearer: “Risk is the standard deviation of return.”

Below is data from the past bear market for 5 of the largest ETF’s in the world. I have chosen to use the standard deviation of the period PRIOR to 2008, Q4 2007. I then show the subsequent drawdown in 2008. Note how in each case of higher standard deviation, the drawdown was larger in the NEXT period.


While the above is just a sample --- I can show this over many, many more ETF's. Thinking about your portfolio from the viewpoint of standard deviation can help you understand at least in some small way about how your portfolio might drawdown relative to some common benchmarks. This chart shows volatilities across these same 5 ETF's over time. Note that each ETF has held its relative position for the past 3 years -- zero change. While you cannot know with precision what the future holds -- you can to some extent understand your relative drawdown given S&P volatility of XX.





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