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ETF Sortino Ratios and More

 

When you plow the internet for ETF Sortino Ratios you find very little (almost nothing).  If the market crisis we are still living through should have taught advisors anything it should be to take a fresh look at your approach.  I have done just that and started with how I look at risk.  

 

Instead of placing so much emphasis on standard deviation, as most of us have been conditioned to use, I have moved to the Sortino Ratio and downside risk.  In case you are not familiar with the Sortino Ratio it is more or less the Sharpe Ratio except you replace the standard deviation in the formula with downside risk.  The larger the Sortino Ratio the better. So, the Sortino formula looks like this:

 

Sortino = (Return - Target Return) / Downside Risk

 

For my calculations the Return is the average return over the last 36 months (where available).  The target monthly return is .48667% (approx. 5.84% annual).  Downside risk is a more complicated calculation but here it is.  First, we identify those returns which are less than the target return each month.  Second,  square those returns that are less than target returns for each month.  Third, calculate the sum of the squared returns from step two.  Fourth, divide that sum by the total number of months.  Last, we find the square root of that number (then multiply it by 100 to get a percentage).

 

My goal was not to pick apart every ETF available in the US, but to look at countries, global sectors, and some US sectors.  Statistics I calculated for each fund are based on 36 months where available.  Statistics compiled  are:

  • Annual Sortino Ratio at 5.84% Target Return
  • Correlation to ticker ACWI (iShares All World Equity Index)
  • Annual Standard Deviation 
  • Annual Downside risk at 5.84% target Return
  • Mean Monthly Return
  • Volatility Skewness (more or less the ratio of months above target to months below target)  Higher the number the better.
  • Cumulative Return for Period 
Below is an image / link to the PDF results.





Disclosure: IAU EEM EWA LQD TIP EABLX MOO IXN IYM JXI VCR