ETF & Unit Tust Risk/Return Survey - ETFs Provides the Industry's Best Returns with the Lowest Risk

A comment I sometimes hear, particularly from Financial Service Providers, is that “ETFs are high risk products.” Intuitively, of course, this seems improbable because ETFs are “passive” tracker funds that mirror the return of an index. As risk is generally measured by the standard deviation against the average (which is measured by an index), it seems unlikely that a passive product (which reflects the index average) can be more volatile that an actively managed product, over time.

Could it then be that the “risk averse” brokers believe that the return (performance) of ETFs does not compensate for perceived risk? We can measure the risk/return performance of Funds by using some well known and proven technology.

The Profile Media data services cover all South African Unit Trusts and ETFs. They use a common methodology to measure a “risk score” for Funds utilising the following measurements:

• Maximum Drawdown – this is the maximum percentage fall in the price (NAV) of the Fund over any period (using monthly prices). This effectively measures the maximum downside risk over the period.
• Sharpe Ratio – measures the standard deviation of a Fund against the benchmark and the excess return of the Fund to determine reward per unit of risk. The higher the Sharpe Ratio, the better the Fund’s historical risk-adjusted performance.
• Sortino Ratio – measures the return of the Fund, less the risk free return, and then divides it by the downside deviation. A high Sortino Ratio indicates a low risk of large losses occurring.
• Risk Score – is calculated by ranking funds on the maximum drawdown as well as the Sharpe and Sortino ratios. The lowest risk score indicates the Funds with the lowest risk.

The Table below shows the Profile Media data for all ETFs, which have over 3 year’s data available, and for selected Unit Trusts. The Unit Trusts are selected from the top 10 performing funds over the past three years (to 14 February 2011) and some other well known Funds with substantial amounts invested in them.

The Table also shows the absolute return over the past three years to give an indication of total performance and the standard deviation, which measures the volatility of the Fund.

All the ETFs, for which 3 years or more data is available, fall into the low to moderate risk classification. Satrix DIVI Plus ETF distinguishes itself by, not only having the best total return over the past three years, but also the lowest risk score.

Many well known, actively managed Unit Trusts (a selection of which are shown in the Table), tend to record significantly higher risk scores than ETFs, indicating not only higher risk profiles, but also inferior risk/return ratios.

The Risk/Return Analysis, provided by Profile Media FundsData service refutes the view that ETFs are high risk or that they do not provide returns that adequately compensate for risk. In fact, the opposite is true – all ETFs fall into the lower risk categories and provide very competitive rewards for their inherent risk.

For more information or detail please contact the undersigned.

Mike Brown

Managing Director, etfSA Phone: 011 561 6653 Email: [email protected]

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