Tuesday, July 17, 2018

Comparing Sector Equity, Commodity and Broad Equity Funds


Comparing Sector Equity, Commodity and Broad Equity Funds

Issue:   An investor is considering eighteen Vanguard ETFs.   Ten of the ETFs are sector-specific equity funds.   Two of the ETFs hold commodities, specifically gold and silver.   Six of the funds are broadly diversified stock funds.

The funds are listed in the table below.


Fund List
Sector Funds
VDC
Consumer Staples
VDE
Energy
VFH
Financials
VHT
Health Care
VIS
Industrial
VGT
Information Technology
VAW
Material
VNQ
Real Estate
VOX
Communication
VPU
Utilities
Commodity Funds
GLD
Gold
SLV
Silver
Broad Stock Funds
VTV
Large Cap Value
VUG
Large cap Growth
VOT
Mid Cap Value
VOE
Mid Cap Growth
VBR
Small Cap Value
VBK
Small Cap Growth



How have these three categories of funds performed based on return and risk over the last five years.

Solve this problem based on the probabilistic return measure developed in a previous post.


Methodology:   Sixteen holding periods are constructed based on four purchase dates (7/1/13, 10/1/13, 1,1/14, and 4/1/14) and four sale dates (7/1/17, 10,1/17, 1/1/18 and 4/1/18).   The average return and the standard deviation of returns over the sixteen holding periods are obtained for the eighteen funds.  The discussion centers on differences in these statistics across fund types. 

The post below illustrates and discusses this calculation for fund VDC.


Fund Return and Risk Statistics:  The average and standard deviation of fund returns over the sixteen holding periods for the eighteen funds are presented in the table below.



Sector Stock Funds
Average
STD
VDC
Consumer Staples
9.3%
1.69%
VDE
Energy
-3.6%
2.48%
VFH
Financials
14.4%
1.19%
VHT
Health Care
13.2%
1.11%
VIS
Industrial
11.8%
1.55%
VGT
Information Technology
19.5%
1.32%
VAW
Materials
9.7%
1.62%
VNQ
Real Estate
8.1%
1.50%
VOX
Communication
5.6%
1.19%
VPU
Utilities
11.1%
1.52%
Commodity Funds
Average
STD
GLD
Gold
-0.3%
0.91%
SLV
Silver
-4.7%
1.31%
Broad Stock Funds
Average
STD
VTV
Large Cap Value
11.4%
1.15%
VUG
Large cap Growth
13.5%
1.09%
VOT
Mid Cap Value
10.7%
0.80%
VOE
Mid Cap Growth
11.1%
1.08%
VBR
Small Cap Value
10.4%
0.81%
VBK
Small Cap Growth
9.0%
1.04%

The summary statistics calculated for the sample of 10 sector funds, 2 commodity funds, and 6 broad funds are listed in the next table.

Summary Statistics on Three types of Funds
Average
STD
Min
Max
N
Sector Funds
9.9%
0.39%
-9.0%
21.6%
10
Commodity Funds
-2.5%
0.28%
-7.3%
1.5%
2
Broad Funds
11.0%
0.15%
7.0%
15.7%
5


Observations:

The average return for the six broad sector funds is larger than the equally weighted average of the 10 sector funds. 

The standard deviation of the broad funds is smaller than the standard deviation of the sector funds.

Neither the gold nor the silver fund performed well over the sixteen holding periods.

An ETF picker who shunned energy and telecommunication sectors may have done better in these holding periods but fund selection is easy with the benefit of hindsight.

The large cap growth fund outperforms large cap value while small cap value outperforms small cap growth.   Small cap growth has both smaller return and larger risk than small-cap value. Small cap growth underperformed the other five broad funds considered here.   This is an interesting result, which deserves additional scrutiny.


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