ETF Expert

It isn’t often that I dedicate a column to “taking on” the Wall Street Journal. I read portions of WSJ.com religiously. What’s more, WSJ journalists often contact me for insights on exchange-traded funds.

Nevertheless, the overuse of the word, “volatility,” at WSJ is discouraging. Yesterday’s “Dubai Dents Emerging Market ETFs” opens up with a warning about the volatile nature of emerging market investing.

I’ve dedicated a fair amount of 2009 on educating ETF investors about the meaning of volatility and the meaning of risk. Consider:

1. September’s “ETF Risk: Why Emerging Market ETFs Are STILL Safer Than Developed ETF Counterparts” and…

2. May’s “Are Emerging Markets Safer Than Developed Markets?”

By way of review, “risk” itself may need to be re-calibrated. For one thing, emerging market investing may lower the risk of outliving your money. Secondly, emerging market investments themselves do not noticeably alter “portfolio volatility” when an EM allocation is raised from 5% to 10%.

And there’s more. Standardized measures of volatility like the risk grades used at RiskGrades.com demonstrate that Vanguard Emerging Markets (VWO) and iShares Emerging Markets (EEM) are not as volatile as one is often led to believe.

For instance, at the time of this writing, VWO has a Risk Grade of 140. Yet small-cap U.S. stocks via iShares Russell 2000 (IWM) has a Risk Grade of 125. Here, the emerging market investment is only 10% more volatile than small-cap U.S. stocks, but you rarely hear stories dedicated to the extreme mood swings of U.S. small-caps.

Taken one step further, let’s look at the returns for VWO and IWM since the end of the 2nd worst market year in history… since 12/31/2008.

Emerging markets have virtually provided 3x the returns for 1.1x the standardized volatility. This sure seems like a pretty advantageous risk-reward relationship.

Perhaps some of us need to let go of our U.S.-centric biases. Many seem to overstate the volatility of “those” markets over there compared to “our” markets over here.

Keep in mind, I would never suggest that stock assets, particularly emerging market sotck assets, aren’t risky. They are! I would say that many people need to rethink their biases as well as their understanding of words like, “volatility.”

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Tags | "etf vanguard emerging", "etfs gains", "etfs risk", "etfs small", "small etfs", "Vanguard emerging etf", Small Cap ETFs