Among ETFs, as many as 80% of them have gained in value from the beginning of this year until today. It is worth noting their characteristics and identifying those that are the most promising in the face of falling inflation and economic slowdown.
Sharpe ratio > Rate of return
When analysing the best funds, it is possible to look at the simple return since the beginning of the year, but such a method does not take risk into account. To take them into account, it is useful to use the Sharpe ratio, used in professional investment portfolio analysis. It determines the relationship between investment return and investment risk.
The Sharpe ratio is the difference between a portfolio's return on investment relative to the return on government bonds considered safe investments, with risk measured by the standard deviation of portfolio returns (read as the average volatility of the instrument over the period studied).
Currently, the average year-to-date standard deviation for the S&P 500 (US500) index was 8.5% (1% per day). With an 8.65% increase in the index, we could have gained approximately 1% on bonds during this time. After simple calculations, we would come out with a Sharpe ratio value for the US index of 0.9. The higher the Sharpe ratio, the more efficient the portfolio is considered to be.
Source: Conotoxia MT5, US500, Daily
The best of the best ETFs
If we were to compare ETFs by return, we would get that the top 5 funds are:
- ProShares Bitcoin Strategy ETF (BITO) - an increase of 71.7%.
- ARK Next Generation Internet ETF (ARKW) - an increase of 37.9%.
- Amplify Transformational Data Sharing ETF (BLOK) - an increase of 37%.
- Ark Fintech Innovation ETF (ARKF) - an increase of 31.4%.
- Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) - an increase of 29%.
However, when the risk factor is added to the analysis, we will see that only two of the above instruments remains in the top five:
- ProShares Bitcoin Strategy ETF (BITO) – Sharpe 1,97
- WisdomTree Europe Hedged Equity Fund (HEDJ) – Sharpe 1,94
- iShares US Technology ETF (IYW) – Sharpe 1,8
- Roundhill Ball Metaverse ETF (METV) – Sharpe 1,71
- Amplify Transformational Data Sharing ETF (BLOK) – Sharpe 1,55
Of the five funds in the first classification, four use different types of leverage: directly leveraging 2 times gold through NUGT, or investments from Cathie Wood of ARK Invest that are indirectly dependent on borrowed capital. This indicates that 'good investments' should be separated from those with high leverage.
Cryptocurrencies are beating the market
Regardless of how you measure the performance of your investment, investing in the ProShares Bitcoin Strategy ETF (BITO) appears that it has been profitable during this period. It is a fund that aims to track bitcoin price movements. However, it should be noted that the fund does not own bitcoin, but invests in it via contracts.
Compared to directly buying bitcoin, investing in a fund seems to give easier access to the cryptocurrency market and greater transparency. In addition, an ETF fund allows investors exposure to the cryptocurrency market without having to hold digital assets in a cryptocurrency wallet.
Currently, it seems that the price of cryptocurrency is largely dependent on expectations of a possible interest rate cut by the Fed. In an era of falling inflation, a noticeable decline in corporate profits and banking sector risk, the aforementioned cut seems to be getting closer every day. Investing in cryptocurrency has proven to be 110% more efficient (as measured by Sharpe) than investing in the S&P 500 index.
Source: Conotoxia MT5, BTCUSD, Daily
Europe revives
Second on the podium in terms of Sharpe ratio was the WisdomTree Europe Hedged Equity Fund (HEDJ), which achieved a return of 16.3%, with a standard deviation of just 7.9%. HEDJ is a mutual fund that focuses on European equities, but at the same time protects investors from currency fluctuations by hedging the euro against the US dollar, which proved to be an additional factor supporting the investment's performance.
The WisdomTree Europe Hedged Equity Fund aims to track the WisdomTree Europe Hedged Equity Index, which in turn is based on European equities (27% Dutch, 25% French, 24% German and 24 others). It appears to be a very good alternative to the DAX, which is particularly popular in Europe.
According to the 'dollar smile' theory we presented in our last article, when economic growth slows down in the United States, someone may see an outflow of capital to riskier investments, and this includes placing capital in Europe. For this reason, it appears that should the dollar continue to weaken against the euro, this fund, as well as the European indices, would have solid foundations to continue their rise.
Source: Contoxia MT5, HEDJ, Daily
Grzegorz Dróżdż, CAI, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73.18% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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