International equity opportunities

Remember that I want you to be healthy, wealthy, and wise, but I am neither a medical doctor nor a financial advisor. I share data I have discovered for your edification. Past results are no guarantee of future returns.

Having said that, I logged into my brokerage account to study the ETFs (exchange-traded funds). Out of curiosity, I sorted them in descending order of Sharpe ratio. The Sharpe ratio is a fraction. Its numerator is mean (average) return (more precisely, mean excess return above the “risk-free rate”, the yield on a 1-month US Treasury bill). Its denominator is the standard deviation of return, a measure of the volatility of the return.

Thus the Sharpe ratio rewards larger returns and smaller volatility. That is the ideal combination, difficult to achieve in practice, because larger returns typically are accompanied by larger volatility. The higher the Sharpe ratio, the less time the investment spends in negative territory.

Traditionally, the best Sharpe ratios have been seen in short-term bond funds, not because their returns are so high, but because their volatility is so low. In fact, the optimization of the Sharpe ratio has been, traditionally, associated with the most conservative portfolios, for those either close to retirement, or already there.

Imagine my surprise when I saw that today’s ETFs with by far the highest 3-year Sharpe ratios were not bond funds at all, but rather international equity funds.

• The top 5 were all Japanese equity funds (hedged for currency exposure). (Disclaimer: I bought one of those five.)

• Six of the next 9 were Indian equity funds, with the others having multiple country exposures.

It may be that the recent collapse in the Japanese yen has had something to do with the recent good performance of the currency-hedged funds.

For comparison, the highest-ranked American fund was 16th on the list.

Of course, the summer months have provided the lowest average stock returns, so right now is not the ideal time to increase your equity exposure. This is even more important in light of the very high valuation of the American stock market, as we discussed earlier:

Be alert to military, political, and economic developments. Resist the mass media’s attempt to limit your thought and discussion to the topic of abortion from now until Election Day. Make sure you are prepared for a cultural disaster, even though we don’t know what it is yet.

Know too that we are surrounded by zombies. I will tell you about some of the zombies who interacted with me in the aftermath of my father’s funeral in a future post.