International Stock Investing: Diversified Timing on Country ETFs
12/27/2009 0 comments
In our previous article, we alluded that in a diversified portfolio, putting a long term timing indicator such as 10 month simple moving average on risky assets such as stocks, commodities could effectively reduce risk (i.e. big loss) while improving return. Investors are in a heightened state of anxiety these days as equity markets are consistently at a level where some analysts find them over valued (such as John Hussman's recent analysis or Robert Shiller's Cyclically Adjusted 10 Year PE ratio (Price to Earnings Ratio). Using a long term timing indicator to safe guard these portions of a portfolio is an effective way to do so.
In the international stock asset, investors could utilize today's diverse array of country ETFs to get an exposure. The following is the list of country ETFs used in this strategy:
- The Netherlands (EWN)
- Germany (EWG)
- France (EWQ)
- Switzerland (EWL)
- Italy (EWI)
- United Kingdom (EWU)
- Belgium (EWK)
- Austria (EWO)
- Singapore (EWS)
- Hong Kong (EWH)
- Japan (EWJ)
- Canada (EWC)
- South Africa (EZA)
The portfolio has equally weighted amount on each country ETF. A 10 month Simple Moving Average (SMA) is used for each ETF. The strategy checks the SMA indicators at the end of each week and does the necessary transactions. Furthermore, the portfolio is rebalanced every year.
The following table illustrates the performance of this portfolio from 5/18/2009 to 12/18/2009.
| Last 5 Years |
Last 3 Years |
Last 1 Years |
Up To Date |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
| Annualized Return(%) |
11.749 |
7.969 |
20.542 |
13.414 |
19.892 |
9.477 |
21.57 |
11.594 |
-6.249 |
20.541 |
| Sharpe Ratio(%) |
70.258 |
43.454 |
109.953 |
84.593 |
186.162 |
69.757 |
134.478 |
47.291 |
-195.092 |
108.191 |
| Standard Deviation(%) |
14.011 |
15.175 |
18.597 |
13.697 |
10.319 |
10.475 |
13.589 |
18.123 |
3.679 |
18.9 |
| Draw Down(%) |
16.916 |
16.916 |
9.694 |
16.916 |
3.938 |
7.902 |
15.169 |
10.354 |
6.529 |
9.694 |
This portfolio compares favorably with the unguarded EFA which has the following performance (2004 is a full year data) while Up To Date being from 5/18/2004 to 12/18/2009.
| Last 5 Years |
Last 3 Years |
Last 1 Years |
Up To Date |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
|
| AR(%) |
3.33 |
-7.032 |
28.904 |
6.21 |
18.93 |
13.322 |
25.806 |
9.951 |
-42.126 |
24.844 |
| Sharpe Ratio(%) |
5.051 |
-24.366 |
89.625 |
16.4 |
123.536 |
103.547 |
162.686 |
44.417 |
-92.86 |
79.664 |
| Standard Deviation(%) |
28.199 |
34.513 |
32.145 |
26.7 |
14.541 |
11.664 |
14.933 |
18.337 |
47.084 |
32.209 |
| Draw Down(%) |
61.761 |
61.761 |
30.238 |
61.761 |
9.806 |
7.192 |
15.755 |
11.576 |
54.496 |
30.238 |
Users could modify this portfolio to allow addition of recently introduced country ETFs such as emerging or new country ETFs including EWZ (Brazil), FXI (China), INP (India, an ETN or INDY, an ETF). RSX (Russia), TUR (Turkey), THD (Thailand), South Korea (EWY), PLND (Poland) and VNM (Vietnam), or even regional ETFs such as EPP (pacific), AFK (Africa), GAF (Africa and Middle East), VGK or IEV (Europe). Moreover, users could change the country weights. It is very encouraging to see that there are some many country ETFs available for investors to get a diversified exposure. Certainly cautions should be taken for those with very little liquidity.
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