Monday, June 10, 2013

Closed End Gold Funds Vs. The #1 Gold ETF

What's better for owning gold... a closed-end fund or the popular ETF GLD?
To answer this we compared GLD, the SPDR Gold Trust ETF, to three closed-end funds:
  • Central Fund (CEF)
  • Central GoldTrust (GTU)
  • Sprott Gold (PHYS)

We're aware of structural differences between these closed-end funds and GLD: tax considerations, fees, premium vs. NAV, spreads, country of origin (U.S. or Canada), and trading volume. Some of these differences might pique our interest in the closed-end funds. But what about returns, correlation, and risk? Does choosing a closed-end fund sacrifice returns or increase risk?
Let's take a quantitative look at the risk and return differences between these products.
Correlation to GLD
First, how well do the closed-end funds correlate with GLD?
  • PHYS has a perfect 1.00 coefficient of correlation with GLD. This is based on monthly total return figures over the past three years. The chart below shows the coefficient of correlation (R) multiplied by 100.
  • GTU has a very strong correlation of 0.97.
  • CEF has a 0.87 correlation, which is still strong, but is not as tight as the others due to CEF's silver exposure which makes up a significant portion of this fund.

Recent returns
On a day-to-day basis, returns vary considerably as seen in the 1-day (1d) column in the chart below. Even over a recent 4-week period, returns vary from -1.9% for CEF to -3.6% for GTU. The year-to-date returns are also not as tightly clustered as we expected, ranging from -17.4% to -22.6% .
Annual returns
Now let's take a step back and look at the 1-year and 5-year returns.
For the 12 months ending May 31, GTU lost the least with a return of -10% compared to GLD's -12%.
For the 60 months ending May 31, the ranking is as follows:
1. GTU +9.21% over the 5 years
2. GLD +8.91%
3. CEF +7.64%.
Note that PHYS isn't old enough to have 5-year returns.
Risk Differences
The standard deviations for GTU, PHYS, and GLD have been in lockstep over the past three years. But CEF shows higher variability with a significantly higher standard deviation over the 1-year, 3-year, and 5-year timeframes. Interestingly, GTU has a slightly better maximum drawdown over the past 60 months (-23%) compared to GLD's maximum drawdown of -25%. CEF, with its silver exposure, had the largest drawdown.
For a chart with more risk measures for these funds (including Beta, R-squared, Modigliani, and Alpha) see our Gold Funds: Risk Analysis.
To review risk vs. return scatterplots of GLD and the three closed-end funds (on a 1-year, 3-year, and 5-year basis) see our Gold Funds: Risk vs. Return Scatterplots.
GTU is worth a look as a complement or replacement for GLD. It compares favorably to GLD over the 5-year period with a slightly better return, lower drawdown, and similar standard deviation. PHYS has a shorter track record and has performed worse than GLD over the past three years. CEF is more volatile than GLD since it is not a pure gold fund, but includes silver exposure.

Wednesday, June 5, 2013

Risk vs. Return Scatterplot for 59 Global Asset Class ETFs

What's the best way to visualize risk vs. return for global asset classes?
We're fans of the tried-and-true risk vs. return scatterplot, using standard deviation and total return. This allows us to quickly focus on portfolios (or asset classes, in this case) that appear in the prized top-left quadrant. To verify the worthiness of the scatterplot, we have also calculated two other risk-adjusted return metrics, shown at the end of this article. These are 1) the Modigliani-Modigliani measure and 2) alpha, using global equities (ACWI) as the benchmark. We prefer Modigliani risk-adjusted percentages to unitless Sharpe ratio. Thankfully, the asset classes appearing in the top left quadrant of the risk vs. return scatterplot also rank highly using Modigliani and Alpha.

Building the scatterplot
To create a "global asset class scatterplot" we gathered risk and return data for a set of 59 global asset classes that could each be represented by an ETF proxy. For the risk metric we used standard deviation of monthly returns and for the return metric we used total return (including distributions). Our time period was 12 months ending May 31, 2013.

Risk vs. Return Scatterplot
In the scatterplot below, asset classes are color-coded according to their broad asset class category: equities in orange, fixed income in green, real estate in purple, commodities in teal blue, and benchmarks in gray.

For the 3-year and 5-year versions of this scatterplot, review our Asset Class Risk vs. Return Scatterplots.

Insights from the broad asset classes
For equities, this chart provides quick visual confirmation that most equity asset classes (plotted in orange) have outperformed other asset classes on a total return basis over the past year. But there's at least one outlier: Frontier equities (FRN, #9 on the chart above), have seriously lagged their peers. Emerging market core equities (EEM, #5 on chart) and emerging market value equities (EVAL, #7 on chart), while still in positive return terrritory, have also lagged.

We can see examples of asset classes offering similar total return at a much lower risk level. For example, compare US convertible securities (CWB, #45 on chart) with International Emerging Small Cap (EWX, #8 on chart). Both have similar returns, but convertibles have a much lower standard deviation.

For fixed income asset classes, we see some interesting comparisons of developed countries vs. emerging markets. International High Yield (IHY, #33 on chart) has offered more than twice the return of Emerging Market Government Bonds (PCY, #40 on chart) with substantially lower risk.

For commodities, the entire group (not just gold!) has lagged over the past 12 months. Silver (SLV, #25 on chart) has taken a particular beating, having the highest risk and lowest return of all asset classes reviewed.
Looking at the numbers
First, let's look at the Top 5 for Total Return over last 12 months: 
  • US Mid Value (IWS) 33.6%, #15 on chart 
  • International Developed Value (EFV) 32.7% 
  • US Large Value (IWD) 32.5%, #12 on chart 
  • US Micro Cap (IWC) 32.4%, #21 on chart 
  • US Small Value (IWN) 31.2%, #20 on chart
For the full list of asset class total return, review our Asset Class Total Return List to see values for all 59 asset classes and 5 benchmarks.

Now let's look at a Top 5 Ranking of risk-adjusted returns using the M-squared (Modigliani-Modigliani) measure. 
  • US Convertible Securities (CWB) 21.0%, #45 on chart 
  • US Hi Yield 0-5yr (SJNK) 3.9%, #47 on chart 
  • US Mid Cap Value (IWS) 3.5%, #15 on chart 
  • US Large Cap Value (IWD) 2.2%, #12 on chart 
  • US Mid Cap Core (IWR) 0.6%, #13 on chart 
For comparison, SPY has an M-squared of 0.04% using the ACWI benchmark.
Finally, here are the Top 5 Asset Classes, based on Alpha: 
  • US Mid Cap Value (IWS) 15.1%, #15 on chart 
  • US Convertible Securities (CWB) 14.7%, #45 on chart 
  • US Mid Cap Core (IWR) 13.1%, #13 on chart 
  • US Large Cap Value (IWD) 12.2%, #12 on chart 
  • US Mid Growth (IWP) 10.4%, #14 on chart 
For comparison, SPY has an alpha of 9.16% using the ACWI benchmark.

For the full comparison of M-squared and Alpha for all 59 asset classes and 5 benchmarks, review our Asset Class Risk-Adjusted Return List.

When using Alpha instead of M-squared, the asset class US High-Yield Short Term Bonds falls out of the Top 5 (to rank 17th) with Alpha of 3.6%. The new asset class appearing on the Top Alpha list is IWP which has an M-squared of -3.72%.

Disclaimer: This report is provided "as is" for informational purposes only and is not intended for trading purposes or advice. Please consult a financial advisor for advice on your specific situation. Neither VizMetrics nor any of its information providers is liable for errors, omissions, or for any actions taken based on this information. This report is subject to the VizMetrics Terms of Service.

Data sources: Inc., U.S. Federal Reserve, VizMetrics analysis