ValidFi News and Articles

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.

Labels: EFA, epp, ewc, ewg, ewh, ewi, ewj, ewk, ewl, ewn, ewo, ewq, ews, ewu, ewy, ewz, eza, fxi, rsx, vgk