High Flying Returns!

Wednesday, February 8, 2017 |

In 2016 the Brazil stock market ETF (EWZ) was up 60% in 2017 while the Russian stock market ETF (RSX) was up 46%.  Pretty impressive considering where they started the year: energy prices down, political corruption/instability, dollar strength, etc.  The list really can go on and on.

Source: Morningstar Direct
 

A few takeaways from this:

  • When the news is increasingly bad, it could be priced into the market and as such anything less bad will probably help equity prices.
  • When valuations are low as in the case of Russia and Brazil stock prices have room to grow.
  • Higher returns come with higher volatility.  For example, the 5-year standard deviation (a volatility measure) is 27, compared to SPY (an ETF that tracks the S&P 500) which has a standard deviation of 10.
  • Combining the above bullets, when the news is bad it can always get worse and catching a falling knife is tough.  For example, in 2015 EWZ was down 42%.

In short, if you’re looking for higher returns then added risk and volatility likely comes with it.  As such, downside control is prudent in the event you’re wrong.


 

An exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs are typically registered as unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Some ETFs that invest in commodities, currencies or commodity- or currency-based instruments are not registered as investment companies. Unlike traditional UITs or mutual funds, shares of ETFs typically trade throughout the day on an exchange at prices established by the market. These ETFs are not managed by the issuer. Investors must buy or sell ETF shares in the secondary market with the assistance of a stockbroker. In doing so, the investor will incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and political uncertainties, not typically present with domestic investments.

S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market.  Investors cannot invest directly in an index.

Standard deviation is a statistical measure of the range of performance in which the total returns of an investment will fall. When an investment has a high standard deviation, the range of performance is very wide, indicating that there is a greater potential for volatility.

Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.  Current performance may be higher or lower than the performance illustrated. Past performance is no guarantee of future results. 

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