For my research project with Professor Sean Daly, we have made significant progress toward coming to a conclusion on our research questions.
In our research, we have utilized various risk metrics such as the information ratio (set with the ACWI as a world benchmark) to arrive at our conclusions. The information ratio is computed by dividing an ETF’s excess returns (“excess” beyond its benchmark return) by its “excess risk” (that volatility above and beyond the chosen benchmark). It allows us to see if an ETF’s returns are really impressive compared to its benchmark and the added risk it entailed.
Most recently, we have measured two separate groups: the PIIGS – a group of developed European countries– and the “Urdanetas,” a name we use to describe a select group of Emerging Market ETFs that have outperformed most other nations in terms of growth.
The PIIGS acronym stands for Portugal, Italy, Ireland, Greece, and Spain. With the exception of Ireland, these countries have information ratios that continue to decline even years after the initial PIIGs Crisis of 2010. Though they are well-known and established markets, these countries are simply not delivering the right risk-adjusted returns from the standpoint of the universe of international ETFs that are now available to US investors.
Named after the famous Spanish navigator that pioneered the Acapulco-to-Manila trade route in the 16th century, the Urdanetas consist of Indonesia, Malaysia, Philippines, Thailand, Sri Lanka, Colombia, Peru and Chile. As a group, they have significantly out-performed their benchmark over the past three years.
As one collective group, these Emerging Markets have triple the annualized returns of the S&P 500 – with a much lower beta (vis a vis the ACWI) and less volatility. This was surprising because during the past three years, there has been a real downturn in oil and commodities. Some of these countries benefit from low commodity prices (the Philippines, Thailand, Malaysia) while others benefit from higher prices (Peru, Colombia, Chile), so there is an interesting internal balance at work.
When comparing the emerging markets of the Urdanetas, the only negative information ratio for the period was Sri Lanka. If as an investor, you were to remove Sri Lanka from this list, then the group would yield an information ratio of 1.48 during 2014-2016, which is remarkable.
Though hardly know to US investors, Peru had an information ratio of 3.24 for the period of 2014 to 2016 – a stunningly great achievement when you consider that anything positive is considered outperformance.
We have also been researching the Nigeria ETF (NGE) as possible “mean reversion” trade, comparing its monthly returns to the Brent futures market since its currency depreciation in June 2016.