NorthWest Quadrant Equity ETFs - Multi-Year Balance Of Return And Volatility

by: Richard Shaw

We reviewed 1,050 equity ETFs and identified the 12 that fall in the NorthWest Quadrant by virtue of having a higher mean return and a lower volatility for both 3 years and 5 years, and also by having a better total return in the crash year of 2008, when compared to the S&P 500.

In a scatter plot of two dimensions, in this case 3-year mean return and standard deviation, the NorthWest Quadrant (the upper left quadrant) is typically set up to capture the "best" data points.

Here are the NorthWest Quadrant ETFs:

click image to enlarge

They were all domestic equity ETFs in almost entirely the defensive areas of healthcare and consumer goods, with one large-cap growth and one large-cap value. The data is through November of 2011.

There is no certainty that they will be in the NorthWest Quadrant at the end of 2012, but they may be according to those more cautious analysts who see a continuation of the problems of 2009-2011 into 2012.

The image identifies those 12 ETFs, providing performance and valuation data. It also shows a scatter diagram plotting the 3-year mean return and standard deviation to illustrate the NorthWest Quadrant.

Were those ETFs held equally in a monthly rebalanced portfolio over 5-years, the portfolio would have produced total return relative to the S&P 500 on a calendar quarter basis as shown by the histogram. The image also shows the best and worst 3-months, 1-year and 3-years for such a portfolio, as well as the 12-month trailing yield, and the portfolio mean return and standard deviation, and Sharpe Ratio (the risk return divided by the standard deviation of return -- where risk return is the total return less the 3-month risk-free Treasury return).

Individual stock selection within the index categories tracked by those ETFs may well have done better, by first avoiding the management fees of those ETFs, and secondly by selection of the more attractive stocks within those categories. However, it is clear from the concentration within healthcare and consumer goods, that those categories were an important positive factor in broad market performance over the past few years.

Defensive equity with income and growth in high quality companies is an important part of what we see as best for 2012. We find that kind of defensive stock in other industries as well, but healthcare and consumer goods have the highest concentration. Aggressive growth may do better, but the downside risks are substantially greater in that type of security in this macro environment. We have some of each, but tilt toward the defensive.

Defensive stocks with income growth are 1 bird in hand and 1 in the bush, whereas aggressive stocks are 2 birds (maybe 3) in the bush. A big bang could scare the birds and make them fly away, but with defensive stocks with income, you have a firm grasp on at least 1 bird.

Disclosure: QVM does not have positions in any mentioned security as of the creation date of this article (January 4, 2012).

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.