A.I.M. For Exchange Traded Funds

[OldAIMGuy]

Reviewing your ETF holdings for Upside and Downside Capture Ratio.......

A true index fund should, in theory, capture exactly the upside and downside of the index exactly. However, today in the world of ETFs we find many semi-active managed funds available. These are a little harder to benchmark than pure index ETFs and funds. How much is that extra layer of management worth to us?

I note that MorningStar how has Up and Down capture ratios listed in their Ratings and Risk heading for exchange traded funds. ( http://performance.morningstar.com/funds/etf/ratings-risk.action?t=FVL®ion=USA&culture=en-US ) Looking at PYH and FVL for the last year and three years shows FVL having a better set of numbers:

Fund                Upside Capture Ratio 
                  1 Yr            3 Yr            5 Yr             
 FVL             134.09          101.36           99.64 
 PYH              87.40           84.59            N/A 
  
                    Downside Capture Ratio 
 FVL             101.32          112.59          116.13 
 PYH             105.63          119.37            N/A

If you are looking for reasons to choose one ETF or mutual fund over another in the same category, this might add weight to your selection process.

In essence we want the highest potential capture ration on the Upside when compared to others in the category. On the Downside, we might choose the lesser capture ratio as being desirable. Overall, it would be nice to always have the Upside be a larger value than the Downside.

Think of a "Performance Capture Ratio" being the upside divided by the downside. I think we'd like to see the Performance Capture Ratio (PCR) be something above 1.00. Otherwise we might as well just own the index fund on which the ETF or mutual fund is based. Certainly something below 1.00 would indicate that we're losing something compared to the underlying index.

Here's some more on this subject:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=61353119

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=60883987

Best regards, Tom