Wednesday, January 30, 2008

1980 - 2007 Stock Market Returns for Various Indices

Last year, I posted a chart of the annual stock market and bond market returns for various indices for the time period from 1980-2006. The chart I previously posted included returns for small cap indices (Russell 2000, Russell 2000 Value, and Russell 2000 Growth), large cap indices (S&P 500, S&P/Citi 500 Value*, and S&P/Citi 500 Growth*), a broad-based foreign stock index(Morgan Stanley Capital International Index for the developed stock markets of Europe, Australasia, and the Far East ("MSCI EAFE index")), and an index of bonds (Lehman Brothers Aggregate Bond Index ("LB Agg.")). I have updated the chart (click on the image for a larger view) to reflect returns for 2007 and have also added historical returns for the Nasdaq Composite Index.

As shown in the chart below (click on the image for a larger view), all of the indices tracked have provided returns far in excess of inflation (inflation has averaged somewhere between 3 and 4 percent since 1980). The Russell 2000 Value index has outperformed all other investment styles over the time frame, returning 4070%, which is an average annual return of about 14.25%. This is total return is excepially impressive when one considers that Small Cap Value stocks were the worst performers of the tracked indices, losing close to 10% in 2007.

The Russell 2000 Growth Index is the worst performer since 1980, on the other hand, providing a total return of just 1011% over the time period, or about 8.98% per year. Overall formidable return of the Russell 2000 Value index is to be expected, given that Small Cap Value stocks have routinely outperformed other investment styles over long periods of time as I have previously discussed.

International stocks were the strong performers last year, with the MSCI EAFE Index providing the only double-digit returns of all of the indices tracked. The MSCI EAFE Index has now outperformed the S&P 500 Index for 6 consecutive years. This is to be expected, given that the U.S. runs an enormous trade deficit with the rest of the world and the U.S. dollar will inevitably weaken.

* I acquired most of the returns in this chart from old versions of the Callan "Periodic Table" of investment returns. The older charts I found provide data for the S&P/Barra 500 Value Index and the S&P/Barra 500 Value Index, instead of the S&P/Citi 500 Value and Growth Indices, respectively, during the time period from 1980-1986. I'm not sure whether the older S&P/Barra indices are substantially the same as the S&P/Citi indices, but they appear to be so.

** Edit - January 2, 2017 ***
I have updated this chart with results through 2016.

Updated "Periodic Table" of Equity Style Investment Returns Through 2007

Posted below is an updated version of the "Periodic Table" of equity style investment returns from 1988-2007. (Click on the image below to see a larger version of the Periodic Table.) This chart was originally posted on the website for Callan Associates.

*If the image is too difficult to see, you can view a .pdf of the image here.

I have written a new post with results from 1989-2008.

Tuesday, January 08, 2008

Proshares Offers a Wide Variety of Interesting Leveraged ETFs

ProShares offers a wide variety of interesting Exchange Trade Funds ("ETFs") that may be suitable to some inventors. The investment company applies financial leverage to implement trading strategies that would be prohibitively difficult for most small investors to replicate. The company’s most interesting offerings are its Short ProShares and Ultra ProShares ETFs.

The Short ProShares ETFs track the inverse of certain indices. ProShares offers Short ETFs that track the inverse of indices such as the Nasdaq 100, the Dow Jones Industrial index (i.e., the Dow 30 index), the S&P 500 index, the S&P 400 MidCap index, and the Russell 2000 index. The ProShares ETFs hold financial instruments such as futures contracts, options, and swap agreements to track the inverse of the respective indices.

The Ultra ProShares are designed to return twice the daily performance of the respective indices being tracked. Some of the more popular Ultra ProShares ETFs include ones that track twice the performance of the Nasdaq 100, the Dow 30 index, the S&P 500 index, the S&P 400 MidCap index, and the Russell 2000 index. The Ultra ProShares ETFs also hold a variety of financial instruments in an effort to achieve their intended strategies.

ProShares also offers UltraShort ETFs that track twice the inverse of select indices, such as the Nasdaq 100, the Dow 30 index, the S&P 500 Index, the S&P 400 MidCap Index, and the Russell 2000 index.

The ProShares ETFs are not for the faint of heart, as they are extremely volatile. However, they are suitable for more experienced investors who wish to make plays on movements of certain indices, such as the S&P 500 index.

Although investors can ordinarily sell short ETFs or purchase or sell futures contracts to profit on the fall in price of indices, the ProShares ETFs offer some advantages. For example, a typical investor selling short an ETF would be subject to potential margin calls and potentially unlimited losses in the event that the ETF that was sold short rapidly increases in value. By purchasing a Short ProShares ETF, on the other hand, the same investor would not be subject to margin calls and the potential losses would be limited to the investor's purchase price of the Short ProShares ETF.

I personally like some of the Ultra ProShares ETFs, such as the Ultra MidCap 400 ETF. The long-term annual returns of MidCap stocks are somewhere around 11-12%, and the Ultra MidCap 400 ETF should exceed those returns over time.

It should be appreciated that due to transaction costs (e.g., the cost of purchasing the futures contracts and options, as well as the cost of running and advertising the various ETFs), it is not possible to return exactly the inverse of an index or twice the return of the index. Moreover, the Ultra ProShares ETFs, for example, are designed to return twice the daily return of a tracked index, as opposed to twice the annual return. Accordingly, in flat markets the Ultra ProShares ETFs may substantially trail double the returns of the tracked index over extended periods of time, although the returns are much closer to that of twice the tracked index during volatile markets.