International ETFs: Profitable But Still Risky

The numbers don't lie. The more exposure that an investor has had to foreign stock assets in 2007, the more he/she has seen his portfolio prosper.

Yet, in the middle of the global credit crisis, there were a number of high-to-low drawdowns of 20%, 25%, 30%. Those losses are bearish and, for most investors, not worth the drama.

For instance, the iShares MSCI Brazil Index (EWZ) fell from 70 to 50 (-29%) in 3 weeks. How many investors can really bite that bullet time and again?

(Note: Those who ignore the need for a plan to sell will, eventually, find themselves in the same place that Year 2000 tech sector investors found themselves in by 2002!)

There are countries and international economic segments that fared pretty well during the July/August correction. For example, Canada has outperformed the U.S. on the upside for more than 5 years; one might even have expected a bigger drop in the correction.

Nevertheless, if you compare the performance of the iShares MSCI Canada Index (EWC) to that of the most commonly used proxy for the United States, the S&P 500 SPDR (SPY), you may feel more comfortable with the associated risk. Specifically, the drawdown from high-to-low for EWC was 15% and the drawdown for SPY was 10%. Some might say that this puts Canada at roughly 1.5% more risk.

So now... what's the reward picture look like? The S&P 500 SPDR (SPY) rose 8% off its bottom while EWC jumped 16%. Some would exclaim that for 1.5x the risk, you get 2x the reward! (This in only one instance and drawdown is only one aspect of risk; nevertheless, over the last 5 years, similar risk-reward patterns have played out in this fashion.)

International sectors of the economy are equally fascinating to examine. And rather than compare everything against a U.S. benchmark, we may simply wish to look at drawdown and momentum across a variety of economic sectors.

For example, the drawdown from high-to-low for the WisdomTree International Energy Fund (DKA) was 20%, whereas the drawdown for the WisdomTree International Communications Fund (DGG) was roughly 10%. Once again, some would explain this by stating that International Energy is roughly 2x as volatile/risky as Telecommunications.

However, both investments gained 20% off the bottom. DKA is far riskier than DGG on the downside, and both may have similar momentum on the upside?

(Once more, this is one instant photo. By no means is this a suggestion that communications is always less risky than energy.)

It's possible that we're looking at a period where turning on the phones/Internet is a safer way to capitalize on a global boom than fueling up the autos, earth-moving machines or factories. After all, if the world were pushed to the brink of non-growth, demand for oil/energy might slow faster than the demand for the ability to communicate with one another.

It's just a thought. (Then again, Canada a la the iShares MSCI Canada Index EWC is all about oil/energy... so go figure!!!)

Comments

[Uncle Bill]

What's with the "some would" phrase? Do you believe this drawdown theory is the proper way to express relative risk? Your bio says you're a risk expert -- is this the way you calculate risk, using this drawdown statistic?