Monday, January 4, 2016

Benchmark Asset Class ETF Returns for 2015

Chemistry 101
Below you’ll see what people in the investment business refer to as the periodic table of (asset class) returns—named in honor of the periodic table of elements that we all studied in our high school chemistry class. Koch Capital updates this table annually with the one-year returns and standard deviation (volatility) of 13 benchmark asset class Exchanged-Traded Funds (ETFs), which collectively represent a broad, global swath of the investable universe.

The table lists the annual returns for each asset class, ranked from best to worst such that the asset classes with the highest returns are listed above those with the lowest returns for the year. The volatility column to the far right displays the annual standard deviation of each asset class to its immediate left; the higher the value, the more volatile the asset class price fluctuations.

Click here to view the entire chart and remember that past performance is not indicative of future results
Source: Koch Capital, Quantext Portfolio Planner

Color Matters
The asset classes are organized by color to make the table presentation more interesting. For example, all the equity (stock) categories are shown in the blues and purples; the S&P 500, a common equity benchmark, stands out in its signature black. The fixed income (bond) categories are in red, orange and tan, and bleed into the yellow colors, which represent alternative asset categories. For this demonstration, the alternatives include just gold and commodities. In green, cash (and cash equivalents), the thirteenth asset class category, is represented by short-term Treasury bonds that mature in one year or less.

In 2015, both US REITs and S&P 500 large capitalization stocks squeaked out slightly positive returns, while just about everything else was flat to down. Since I’m showing the actual ETF total return (price appreciation plus dividends), the reported return will differ slightly from the underlying index return which reports just the price appreciation (depreciation) with no tracking error.

Commodities were the big losers in 2015 given the decline in energy prices and strong US dollar. Gold continued its fourth year of mediocre returns and Emerging Markets saw double digit declines primarily due to the China slowdown.

Pattern Hunting
As humans, our brains naturally try to find patterns in what we see. Do you see any predictable pattern of asset class returns from one year to the next? The answer is no. The point here is that asset class returns are random no matter how convincingly your brain tells you, “Hey, I see a repeating historical pattern here and I’m sure it will repeat in the future.”

The more subtle piece of information in the table above is the relationship between risk and correlation. Even though long-term Treasury bonds (red) are volatile (risky), this asset class is uncorrelated with most stock-based asset classes. When the S&P 500 (black) has good year (over 10% annual return), long-term Treasury bonds (black) tends to underperform, and vice versa. Thus, you get the classic zig-zag relationship between stocks and bonds/alternatives, a return saver courtesy of real diversification that helps your portfolio survive in years like 2008 and 2011.

Occasionally there will years where both stocks (S&P 500) and bonds (US Gov’t 20yr Treasury) deliver negative returns, although I haven’t recorded this outcome since starting the periodic table in 2001. It’s not a question of if but when this double barrel nasty outcome will occur. And when it does, make sure you have a strategy to control your emotions and a plan to stay the course.

About Jim Koch
Jim Koch is the Founder and Principal of Koch Capital Management, an independent Registered Investment Advisor (RIA) in the San Francisco Bay Area. He specializes in providing customized financial solutions to individuals, families, trusts, business entities and other advisors so they are better able to achieve their goals. Jim sees himself as an “implementer” of financial innovation, using state-of-the-art technology to provide practical investment management and retirement planning solutions for clients.

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