Finding the Best Proxy
When we are examining a fund or a portfolio and one or all of the inputs has a short history we have a couple of choices: a) ignore the issue or b) find a proxy with a longer history that best resembles the performance and the characteristics of the investment with the short history.
Thanks to the depth of the ETF market, almost every strategy imaginable is available for proxy building. Currently there are approximately 1,100 ETFs that have a return history of at least 10 years with total ETFs (US and Canada) approaching 6,000 in number.
These ETFs represent innumerable passive beta strategies which replicate well known benchmarks, such as the S&P 500 and more recently a large number of active “black box” quantitative strategies. ETF return data has become a gold mine of information for those wanting to search for relevant proxies.
In recognition of this “proxy availability”, Sandbox created a convenient tool that examines all the ETFs to find the best proxy. We called it “Finder’. Finder searches all 6,000 ETFs to find (and rank) the ETFs that are most highly correlated to the strategy the user is interested in.
A short digression on Sandbox. The chart below is an equally weighted portfolio of the top 10 US Banks displayed in VAMI format. Note the 2009 drawdown of 66%.
Among many other tools, Sandbox permits the user to reset the start date and end date and get a visual of when excess performance begins/ends & the associated statistics for any period or portfolio. The user can set the individual weights, do equal allocations or have Sandbox suggest. Note how the chart above shows the excess performance of TD Bank over the entire period. When we choose a more recent start date the results show neck-and-neck out performance by Morgan Stanley & Goldman. Choose a different start date…see a different result! Still, the max drawdowns are not surprising as these banks are so correlated. They all hit the skids together, but some don’t get off the mat.
Anyhow, back to “Finder”. This app takes any return stream (or an uploaded portfolio) and then searches for the most relevant ETF. In this case, we presented Finder with a 4 year history of US banks (essentially the bold red line from the above chart) and asked Finder to search the ETF database & find the best proxy with a longer history, ideally back to at least 2010. Below are the ranked results:
Finding the best proxy for our 4 year history. Ranked and ready for analysis
Here is the 15 year history of the chosen proxy. The correlation over 15 years remains consistent with our 4 year input.
If Finder discovers the best Proxy is a levered product, Finder can then turn it over to “Stretcher” which does the de-lever. We can show you how that works.
So, one can visually review each of the suggested ETF proxies and then use Sandbox to see the holdings and settle on best proxy for longer period analysis to incorporate into your longer dated research.
Sandbox: lots of data, highly interactive, accessible anywhere.
info@sigmasandbox.com or call us at 416-879-6204