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Lower-Risk ETFs With High Risk-Adjusted Returns

Charles Bolin profile picture
Charles Bolin


  • Risk, rank, return compared to peers, Ulcer Index, and Martin Ratio were used to select 25 funds in different Lipper categories.
  • Different measures of risk and risk-adjusted return are compared.
  • Three portfolios are compared in Portfolio Visualizer using these lower-risk, higher risk-adjusted return ETFs.

With any method for computing investment risk and performance, it is important to use data covering as long a time period as possible. In particular, the measurement period must include both bull and bear markets for the investments of interest.

- Peter G. Martin

How Do You Measure Risk in ETFs?

I discuss seven different measures of risk and three measures of risk-adjusted returns. A summary for portfolios from 1932 to 2017 is shown below for Maximum Drawdown, Standard Deviation, Sharpe Ratio and Martin Ratio. The table is from "How Bad Can It Get?" by Charles Boccadoro. It is a comparison of the Sharpe Ratio to the Martin Ratio for the past 85 years by stock-to-bond ratio. For interested readers, I described the Ulcer Index and Martin Ratio in The Great Owl Portfolio last October.

The table shows that the portfolio with the highest Martin Ratio consists of around 30% stocks, compared to 40% stocks for the Sharpe Ratio. I also like that the Martin Ratio shows a wider range of values, as I believe that it captures a better estimate of risk. For example, the Martin Ratio for a 70% stock/30% bond portfolio is 35% lower than a 30% stock/70% bond portfolio, while the Sharpe Ratio is only 4% lower. Also noteworthy is that the 70% stock/30% bond portfolio has twice the drawdown of the 30% stock/70% bond portfolio. Over a very long period of time, portfolios with higher allocations to stock outperform, but my investing time horizon is not 85 years.

(Source: MFO.)

High Risk-Adjusted Return ETFs

I selected 25 funds from 24 Lipper categories based on risk, risk-adjusted returns, and performance compared to peers using Mutual Fund Observer Premium Search. Many of these are appropriate for a late business cycle stage leading into a recession.

Symbol Name

This article was written by

Charles Bolin profile picture
I use Mutual Fund Observer MultiSearch as the primary tool to analyze and rank funds based on risk, momentum, quality, income, and consistency factors. I classify nearly 300 funds each month by investment buckets for risk and trends. I began contributing to the MFO monthly newsletter in 2019.I retired in June 2022.  I am an individual investor and retired engineer with an MBA.

Analyst’s Disclosure: I am/we are long FXU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (26)

Hello, Charles. I know you are invested in VFMF, so the following link might interest you. I suspect there are Dow ETFs that could be as cheap at the Vanguard Multi-Factor.

Charles Bolin profile picture
Thank you, @exeditor. I did own VFMFX. It was more volatile than the S&P500 during the recent correction. I sold it when it recovered. I am focusing on funds that do well in down turns. By the way, I was not able to open the link. Regards.
Charles Bolin profile picture
Another excellent article, @exeditor, thank you.

Hello, Charles. You might enjoy this.
Baldy2000 profile picture
Charles, Thanks for your comments, Cheers.
Baldy2000 profile picture
Charles, have you looked at SPLV. It has only 5 years of data, so has not been recession tested. I will have to study you list more closely. I currently have $$ in 6 mo treasuries to provide protection for my DGI portfolio. Cheers
Charles Bolin profile picture
@Baldy2000, I own a small amount of SPLV, but no, I have not written about it in an article. It is a good fund. What I like about Mutual Fund Observer is it's risk analysis of funds. The Ulcer Index is 3.2 for SPLV and 3.5 for USMV compared to 5.8 for SPY. The drawdown of these two low volatility funds is only 40 to 50% of SPY. The P/E are comparable to SPY.
RettW profile picture
Standard deviation also assumes a normal distribution for these funds, which is not the case. Multiplying s.d. by 6/(6+skew) seems to probabilistically estimate their fat tails well.
How might you use Relative Strength from ETF screener to further protect your portfolio from downside, and still ride upside?
6264541 profile picture
Could you clarify your comment? Standard deviation Is defined independent of any probability distribution. It’s significance depends on the probability distribution.
Charles Bolin profile picture
Thank you for you comment, @Sanya Robert. Standard Deviation, Sharpe Ratio and the other metrics are time dependent. Standard Deviation typically gets larger during bear markets. Secondly, the time period was short making the metrics more reflective of conditions instead of long term performance. I used the last 13 months to show the recent volatile trends. Returns were lower and standard deviation higher. Sharpe is the return above treasuries divided by standard deviation.
Thank you for the work and the excellent series. What is puzzling to me is the Sharpe ratio for your portfolio is quite low.
keltus 1952 profile picture
Holding SPHD. It pays monthly. Fees a little high @ .30%. Nice piece of my pie though.
6264541 profile picture

I did a backtest on your 4% volatility portfolio back to Nov 2012


and got downside capture ratio of 21.14 %. That could indicate be a significant drawdown in a coming recession. Your thoughts on this.

Charles Bolin profile picture
Isn't Portfolio Visualizer great, @6264541? If the S&P500 goes down 40% and the portfolio captures 20% then the drawdown would be 8% which is good for a portfolio of 35% stocks. If one is more risk adverse than this then they could reduce stock exposure to 20%, but this allocation will not keep up with a 4% withdrawal rate and inflation. I believe many if not most investors want a portfolio to buy and hold and are okay with an 8% drawdown. I try to set my allocation according to the business cycle.
6264541 profile picture
I agree that the Portfolio Visualizer optimization to is great. Thank you for pointing it out in your articles. I agree that your 4 % portfolio is good, but I am trying to do a little better by using some more aggressive assets. So by using PONAX, SPLV, QQQ, and BTAL I got some interesting results. I limited PONAX below 40 % and got these results:

1) Maximize return at 4 % volatility

CAGR of 8.16 %, MDD of 2.59 %, upside capture 34.9 %, downside capture of 10.7 %.


2) Minimize variance

CAGR of 7.29 %, MDD of 2.85 %, upside capture 28.9 %, downside capture of 3.4 %.


Essentially these portfolios have comparable capture ratios to PONAX (31 % up/ 5 % down) with better returns in 2018.

Charles Bolin profile picture
Nice, Jeff. You can set the Optimization Goal to "Maximize Return subject to" and the "Compared Allocation" to "Maximum Sharpe Ratio Weights" and get the results in one run.

These are interesting results. Looking at the Efficient Frontier or Assets, BTAL has lost nearly 2% on an annual basis with a standard deviation of 11%. It had a maximum drawdown of 22%. I see that it moves in the opposite direction of the other funds which will reduce volatility. I substituted MINT for BTAL and the return went down and the MDD increased.
Once again, thanks for your work. I assume you're using the Target Volatility Market Timing Model in PV to arrive at the portfolio weights in the article. This model requires 'seed' values for the portfolio (asset symbol and %), what values did you use to seed it? I've entered various values and target Vols, but get different numbers from yours. It might be easiest if you could export the link (in the Market Timing line) and copy it in a reply.
Thanks in advance, Jack.
Charles Bolin profile picture
Thank you, @jackcollinsjr. I used 4%, 6%, and 8% as target volatility and they will be close to the results. I also use fund constraints and category constraints to ensure diversification and to avoid allocating too much to a non-core fund. Finally, I round the allocations up to the nearest 5% for the article. Sorry, but I only saved the PDF of the output and do not have a link.
Charles Bolin profile picture
Thank you, @tmow. I am planning an article on Global Funds soon and it will include VMNVX and ACWV.
Looking forward to that article as I have used these funds for international exposure along with EFAV.
Super article Charles! You covered a lot of my favorite ETFs. I would add two global funds for your consideration (VMNVX and ACWV) and as far as risk-adjusted returns go, PIMIX is a bond fund that has superior risk-adjusted returns.
meowy profile picture
very cool article wjth lots of data. i am comfortable with Vanguard Wellesley and Global Minimum Volatility funds in terms of risk/reward. Lots of diversification and strong exposure to developed and emerging markets. high quality bonds and stable stocks and decent yield between the two of them. cash is Vanguard Prime MMF.
Charles Bolin profile picture
Thank you. My strategy is to reduce risk without being bearish prior to the next recession.
goyum profile picture
Thanks Charles. Excellent analysis and very clearly written. Provides me with several new investment alternatives. Am still reinvesting and building three low-moderate tax/non taxable portfolios that will not require tactical monthly management, for about 10-20 MFs and ETF's. Still have to re-read your latest articles again.
Charles Bolin profile picture
You are welcome.
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