Best Timespan
for
Market Analysis


Guide plus Showcase
of Exchange Traded Funds
for Emerging and Developed Markets



The best choice of timespan for a performance review depends on the status of the investor as well as the state of the market. In this way, a fitting window in the backward direction is closely tied to the planning horizon going forward coupled with the likely conditions downrange.

In that case, the impact of an unusual event in the past ought to be downplayed or excised entirely. To this end, one approach is to select a short window that excludes the exceptional fluke. The second ploy is to pick a prolonged stretch that serves to dilute the impact of the aberrant case on the marketplace.

Depending on the context, the investor may have scant choice regarding the use of one approach or the other. An example involves a youthful asset which has little to offer in the  way of a price history. In that case, the use of a prolonged window is out of the question.

An apt choice of timespan applies to any type of market, whether tangible or virtual. An example is found in a lonesome stock or a personal portfolio, a raw commodity or a national economy.

In the modern era, a glaring anomaly cropped up with the financial crisis of 2008 and its aftermath. The bombshell sparked the worst smashup of the financial system since the Great Depression of the 1930s, along with the biggest flop of the global economy since the Second World War. As a result, the blowup was an oddball on a whopping scale which is unlikely to recur in the near future.

Given this backdrop, a wanton choice of time frame for market analysis could lead to warped results which have scant relevance to the prospects downrange. In that case, the cogent approach is to tone down or cut out the extreme effects resulting from the financial catastrophe.

These issues are examined by way of a case study dealing with exchange traded funds for the emerging regions as well as developed markets. The quartet of index funds under review includes a couple of vehicles which in some sense straddle the entire planet. By contrast, the remaining two vessels focus on a pair of individual countries; namely, the U.S. and Britain which serve as spearheads of the financial forum and the real economy for the world at large.


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In sizing up the performance of a market, the first task of the investor is to select the time frame for analysis. From a pragmatic stance, the window of evaluation in the past ought to resemble the conditions looming on the horizon.

In picking the timespan, the crucial factors include the length as well as the location of the window. To bring up an example, the state of the market in recent years is more likely to resemble the conditions going forward than those from the remote past.

On the other hand, the environment at large could display a number of features which favor a different choice of timespan. A case in point is a recession in the global economy which happens to resemble an episode that occurred a couple of decades ago. In that case, the distant window is apt to mirror the current setting better than a timespan from the immediate past.

A vital task for the lucid investor is to size up the target market in terms of growth as well as risk. For this reason, the window of evaluation ought to provide a rounded view of performance by spanning a stretch in which the market has experienced a boom as well as a bust. The assets at hand may then be compared in terms of the return on investment as well as the level of volatility.

Case Study of Exchange Traded Funds


For the worldly player, a handy way to invest in global markets is to take up a clutch of exchange traded funds such as those available in America. In addition to the attractions of size and diversity, the U.S. bourse serves as the bellwether of the equity market throughout the planet.

In gauging the performance of the stock market, the most popular benchmark among professional investors lies in the Standard & Poor’s index of 500 giants on the U.S. bourse. The proxy for the bourse as a whole is tracked by an exchange traded fund fielded by an asset management group called State Street Global Advisors (ssga.com). The index fund trades under the ticker symbol of SPY.

Another pacesetter on the global stage is found in Britain. The progressive nation is a trailblazer in the financial forum as well as the real economy.

Within the American market, the leading vehicle for the British bourse is found in the United Kingdom fund. The communal pool, managed by an outfit named iShares (ishares.com), trades in the U.S. under the call sign of EWU.

Rather than focus on specific countries, an index could cover a raft of markets. A case in point is a benchmark for Europe, Australasia, and the Far East (EAFE). The yardstick was developed by a service provider named Morgan Stanley Capital International; the group now goes by the acronym of MSCI (msci.com). The wide-ranging index is a popular benchmark for the developed markets of the world with the notable exception of North America.

The yardstick is replicated by another product from the iShares group. The corresponding fund trades in the U.S. market under the label of EFA.

Meanwhile the Emerging Markets fund from the Vanguard Group (vanguard.com) is the standard bearer for the budding regions of the world. The exchange traded fund flies under the banner of VWO.

The quartet of index funds presented above can serve as a compact set of vehicles for gauging the performance of developed as well as emerging markets. In the sections to come, these rigs are compared against each other in terms of risk as well as return.

Leading Markets and Standard Benchmarks


In line with earlier remarks, an exchange traded fund is a convenient way for investors to participate in diverse markets ranging from stocks and bonds to commodities and currencies. A communal pool of this sort is listed on a stock exchange. As a result, the shares of an ETF can be bought and sold through a brokerage account for the equity market.

In that case, an exchange traded fund dealing with any type of asset also happens to be an equity. Given the linkage to the stock market, a germane baseline for comparison lies in the Standard & Poor’s index of 500 stalwarts. The latter yardstick is closely tracked by the flagship fund for the U.S. bourse; namely, the vehicle dubbed SPY.

In sizing up a market of any sort, the first task of the investor is to select a suitable window of analysis. For a balanced view of performance, the period of evaluation ought to cover a stretch in which the market has experienced an upsurge as well as a crackup. The candidate assets can then be compared in terms of the return on investment along with the level of volatility.

Graphic View of Performance


A graphic display of the price action can provide an intuitive grasp of the marketplace. For this reason, a staple of analysis is a price chart that depicts the relative performance of the assets under consideration.

The exhibit below has been adapted from Yahoo Finance (finance.yahoo.com), the most popular portal for investors. The plot shows the relative movement of the index funds over the course of five years ending in the summer of 2012. (Clicking on the image summons a larger version of the diagram.)




In the foregoing chart, the path of the vehicle for the United States – namely, SPY – has been sketched out in blue.  Meanwhile the corresponding trail for Britain is shown in green. To round up the list, the trace for EFA is painted in red while that of VWO is rendered in brown.

The chart above provides a visceral view of the action in the stock market. As an example, the vehicle for emerging markets bounced around a lot more than SPY, the flagship fund for the American bourse.

Another salient feature lies in the steady recovery of the U.S. market in the wake of the financial crisis. After hitting rock bottom in spring 2009, SPY managed to regain its footing and clamber higher.

Granted, the upward tramp was marred by a flurry of backtracks from time to time. Even so, the halting progress of the index fund simply mirrored the usual behavior of the stock market in any kind of climate.

On the downside, a slew of markets round the globe were battered by the hailstorm in Europe raging after the financial fiasco of 2008. An example in this vein was the brouhaha over the credit market in Greece along with fears of a complete breakdown of the regional currency.

Amid the hullabaloo over the fate of Europe, the index fund for Britain struggled to make  headway over the next few years. The story was similar for the EFA pool.

The preceding chart portrays the antics of the stock market during and after the financial crisis of 2008. In a number of ways, though, the exhibit does not depict the usual lot of the bourse over the near term nor the long haul.

A counterexample lies in a habitual move of the market to the upside despite an endless barrage of setbacks. In other words, the bourse tends to rise more often than fall over all time frames ranging from the short to the long.

We can tell from the preceding chart that each of the index funds fell in excess of 10% over the span of 5 years. The main factor behind the takedown involved the extreme plunge following the financial flap of 2008.

On one hand, there are no certitudes in the financial arena. In that sense, at least, the marketplace resembles any other area of everyday life.

Even so, a blowup on a scale matching the financial bombshell of 2008 is unlikely to crop up again for generations to come. Based on this premise, the mindful investor ought to take steps to counter the severe effects of the exceptional event.

To this end, one course of action is to select a longish window, perhaps lasting 10 years or more, which serves to dilute the impact of the rare fluke. On the other hand, a decision to employ a prolonged stretch can lead to stumbling blocks of its own. An example of the latter is a shortage of historical data.

For the case study in hand, the index fund for emerging markets was launched in March 2005. For this reason, a span of 10 years ending in 2012 would exceed the storehouse of price data available for VWO.

Looking in the opposite direction, we could pick a shorter timespan that excludes the financial crisis. That is in fact the tack taken in the next section.

Compact Window for Performance Review


At this juncture, we turn to a chart which deals only with the last portion of the timespan covered by the previous plot. More precisely, the exhibit below covers a window of two years ending in the summer of 2012.




As it happens, the interval straddles a crash of the stock market that popped up during the second half of 2011. In that sense, as well as a number of other ways, the plot depicts a representative stretch of the action on the bourse.

Among the quartet of index funds under review, the U.S. vehicle turned in the best performance over the span of two years covered by the chart. On one hand, SPY advanced less than EWU during the run-up to spring 2011. On the other hand, the American vessel managed to crumple less during the crackup of the market later that year.

After that milestone, the U.S. pool rebounded smartly during the winter before slumping once again the following spring. Despite the gyrations, though, SPY ended up about 33% higher over the entire stretch of two years. As a result, the American pool boasted a clear lead over the other contenders.

Moreover the swings of fortune faced by the American fund were less pronounced on the upside as well as the downside. In other words, SPY was more demure than its rivals. As a result, the index fund delivered a higher payoff in the end with less risk along the way.

By contrast, EFA turned in a lackadaisical performance over the same period. The same was true for VWO. After thrashing around for a couple of years, each of these funds managed to eke out a teeny gain amounting to an annual rise of a couple of percent on average.

As to be expected, the index fund for the emerging regions was more flighty than its rival called EFA. The wild ride of the sprouting markets is spotlighted by the severe breakdown of VWO during the autumn of 2011.

By comparison, the index fund for Britain turned in a passable performance that lay somewhere between those of the American vessel on the high side and the two laggards at the low end. The British rig took the middling road in terms of the level of volatility as well as the return on investment.

Roundup of ETF Performance


As we noted earlier, the purpose of the S&P benchmark is to track the giants of the U.S. bourse. Each company covered by the index is a colossus of the real economy. Due to the size and strength of the outfits, the stocks within the benchmark tend to be more sedate than the bulk of the equities in the marketplace.

For this reason, the S&P index tends to be less jumpy than most of the yardsticks for other countries or regions. As a consequence, the corresponding fund behaves in a similar fashion.

Over the span of two years covered by the previous chart, SPY turned out to be the least volatile of the four funds. A second, and related, trait lay in the fact that the U.S. vehicle turned in the best showing on a risk-adjusted basis over the span of two years.

By contrast, VWO was the most jittery while EFA was somewhat less so. Finally, EWU lay somewhere between the extremes in terms of turbulence as well as payoff.

Given the moderate level of flightiness as well as the superior return on investment, SPY managed to steal the show over the span of two years. The outcome was similar for the winsome showing of the American fund over the longer stretch of half a decade that straddled the financial crisis and its aftermath.

Typical and Quirky Aspects


The period covered by the 2-year chart is representative of the stock market in a couple of ways at least. One aspect involves the fact that the bourse managed to trudge higher from start to finish in spite of the usual upsets from time to time.

On one hand, the stock market has a habit of surging as well as slumping over time. Even so, the bourse is more likely to rise than fall over short spans as well as long spells.

Another facet involved the smashup of the equity market in the autumn of 2011. The bombshell reflected the tendency of the bourse to break down a couple of times per decade.

On the other hand, there are certain features of the charts which are unlikely to prevail over the long range. A prime example concerns the lousy turnout for VWO.

The early 2010s was a period of unusual angst in the financial ring as well as the real economy. The jitters stemmed from the anxiety of international investors over the shenanigans of public officials in the advanced countries.

As an example, the politicians of the West had a perverse habit of choking the economy by propping up the most unproductive outfits. A showcase of the latter was a clique of reckless banks that had gambled to excess with other people’s money then turned to the public treasury to bail them out.

A second, and related, bungle lay in the costly schemes of the politicos for propping up the bond market in Greece as well as neighboring states. The flimsy pretext was that the credit markets across Southern Europe had to be buttressed in order to save the common currency on the continent.

On the other hand, anyone with a smidgen of practical savvy could see at once that the true purpose of the rigging was to rescue of bunch of cloddish banks located in France and nearby countries. Naturally, the throng of investors were alarmed by the volley of excuses along with the hail of boondoggles whose main impact was to hamstring the financial system and the real economy. In their anguish and despair, the frantic players in the stock market knocked down not only the bourses of the afflicted countries, but those of faraway nations as well.

The folly in Europe was a follow-up to the burlesque of the housing market in the immediate aftermath of the financial crisis a few years earlier. In a fit of incontinence, the politicians of the West had pumped out a slew of sloppy schemes to shore up the property market when it duly imploded after a manic buildup in the run-up to the financial flap.

Given the mounds of nutty schemes in tandem with artificial shackles, the housing sector could not cast off the blubber it had accumulated during the frenzy in real estate. As a result, the housing market – which in general acts as a vital branch of the economy – turned out to be a brake on the economy rather than a engine of growth.

Amid the swill of fear and stress in the marketplace, the investing public fretted over the prospect of a global recession that could sink the emerging regions along with the industrialized countries. As a result markets of all stripes, whether real or financial, thrashed around and made scant progress.

On the upside, though, a sliver of hope shone through the thunderclouds. Despite the best efforts of the politicos in the West to strangle their economies, the sprouting regions of the world were slated to grow and even thrive over the long haul. As a result, the stock markets in the budding nations were bound to flourish in due course despite the ceaseless cascade of sideswipes en route.

Given this background, the charts above were not trusty portraits of the outlook over the decades to come. The stunted progress of the emerging markets depicted by the charts might prevail over the short run and the medium term, but not the long haul.

To recap, certain features of the marketplace were bound to hold sway going forward.  A case in point was the yucky performance of the emerging regions over the near term as global investors continued to bite their nails over the antics of the politicians in the industrialized countries.

Another sample was the crummy performance of European stocks due to the hanky-panky of the pols. In this light, one causal factor was a whopping waste of money in order to rescue a gang of witless banks that had gorged on rotten assets churned out by the profligate regimes ensconced in Southern Europe.

Looking at the big picture, the purpose of analysis for the wily investor is to gauge the prospects for the future. In a shifty environment racked by upthrows of all kinds, however, the future will almost surely differ from the past in a host of ways.

For this reason, any attempt to pin down the past as a basis for sketching out the morrow will suffer from lots of flaws. Even so, the shrewd player has to make a concerted effort to find a good match between past experience and future prospects. In this sense as well as a bunch of others, the financial forum is no different from any other patch of everyday life.

Moving Forward


In sizing up an asset of any kind, the investor has to weigh the prospective return against the risk entailed. The crucial factors to consider are surveyed in the section on Financial Risk at MintKit Core.

A primer titled “How to Invest in Exchange Traded Funds” gives the lowdown on growth and risk for exchange traded funds. Moreover the review applies the general concepts to a case study dealing with index funds for the emerging markets of Brazil, China, India and Russia.

The data available on exchange traded funds is often patchy, faulty and/or misleading. The stumbling blocks, along with defensive moves for the wary investor, are discussed in an article at MintKit titled, “Cruddy Information on Exchange Traded Funds”.

For many years after the financial flap of 2008, the governments of the West went out of their way to buttress the distortions in real and financial markets that had built up during the ramp-up to the blowout. Instead of prolonging the malady, the politicians ought to have left the economy alone to heal itself. Better yet, public policy could have helped to undo the damage inflicted by berserk speculators throughout the entire meshwork of production and distribution.

The problem of misguided schemes, along with a palette of cogent solutions, are discussed elsewhere in greater detail. As an example, a report titled “Charade of the Debt Crisis” provides a survey of the crucial issues.

Given the glut of counterproductive schemes churned out by the pols, the economy in each of the abused countries was fated to flounder well into the 2010s and beyond. As a result, the corresponding bourse – as in the case of the U.S. and Europe – would also struggle mightily to gain traction and press beyond its prior peak.

On the other hand, there was no good reason for the emerging regions of the world to behave likewise. Instead, the budding markets could and should trudge ahead even if the mature countries happen to stagnate.

As long as the sickly countries of the world avoid the grave misfortune of tumbling into a deep recession, the emerging markets will continue to soldier on. In that case, the bourses of the peppy countries will clamber higher over the decades to come.

To round up, the best choice of time frame depends in large measure on the outlook for the morrow. The prospects downrange include the length of the planning horizon for the investor as well as the likely behavior of the market under consideration.

From a conceptual as well as pragmatic stance, the matchup of the past and present against the future is a matter of degree rather than category. The real issue is not whether an accurate forecast is possible, but is instead the nature and extent to which the preview makes sense.

Granted, there will always be plenty of room for error. The reason, of course, is that the conditions downrange will differ to a greater or lesser degree from those upstream.

Despite the mismatch, however, certain stretches of time will resemble some spells more than others. Although there is no perfect solution, there are good choices and bad ones.

In spite of – or due to – the chaos of the marketplace, the shrewd investor has to approach the task of selection in a coherent fashion. After picking an apt timespan, the decision maker must also take into account the raft of differences between the chosen window of analysis and the shifty vista looming on the horizon.

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