Morningstar Advisor - December/January 2012 - (Page 70)

Screens Yield, Please (Hold the Europe) By Patricia Oey We like these international equity ETFs for their yield and relatively low volatility. While European leaders try to move forward with a plan to address the sovereign debt crisis, there is plenty of uncertainty as to what lies ahead. Uncertainty begets market volatility, so risk-averse investors looking for exposure to international stocks might want to consider lower-volatility funds with relatively lower European exposure. To generate a list of all exchange-traded funds that hold international equities and less than 50% exposure to European equities, we used this screen in Morningstar Office (a similar screen can be performed in Principia, minus the Sortino ratio criterion): As a point of comparison, the developed-markets MSCI EAFE Index (Europe, Australasia, and Far East) has a 66% exposure to European stocks and the MSCI ACWI ex-US (All Country World Index, ex-US) has a 50% exposure to European stocks. Next, we added a screen for yield and eliminated ETFs that held REITs: And And 12 Mo Yield Global Category . 3 / 5 Real Estate Sector Equity Finally, we screened for volatility: US Broad Asset Class 5 International Equity And Equity Region Greater , 50 Europe And Sortino Ratio 3 Yr (Mo-End) . 0.4 International equities tend to be more volatile than U.S. equities, especially in the short term, because of currency effects. Over the past three years, certain categories within international equities have experienced high volatility but strong performance as well. Instead of using standard deviation or the Sharpe ratio as screens, which penalizes both upside volatility and downside volatility, we used the Sortino ratio, which is a measurement of return per unit of downside risk. It is similar to the Sharpe ratio in that it has the same numerator (the return of the portfolio minus the risk-free rate) but instead of using the portfolio’s standard deviation as the denominator, the Sortino ratio uses the standard deviation of negative returns only. In simpler terms, the Sortino ratio only considers downside volatility as risk. For this screen, we looked for funds with three-year 70 Morningstar Advisor December/January 2012

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

Morningstar Advisor - December/January 2012