If you thought last quarter’s US stock market volatility was tough, just consider what happened to emerging market equities. A few stats to put this in perspective:
- The S&P 500 was more volatile than usual. There were 64 days in 2018 when the S&P 500 gained or lost one percent or greater (our preferred measure of volatility). That was more than the average of 53 dating back to 1958 (first full year of data).
- Emerging markets (using the EEM ETF as our dollar-based proxy) had 113 one percent days last year, almost double the S&P 500’s price volatility.
- Of course, we’d expect emerging markets to be more volatile than the US stock market, but is it worth the risk? While the S&P 500 dropped by 6.2% last year on a price return basis, EEM fell by 17.1%.
- To balance out the conversation, EFA (an ETF that tracks dollar-based returns of developed market equities, excluding the US and Canada) was less volatile with 51 one percent days. It still underperformed the S&P 500, down 16.4%.
This is just one year, so you may be wondering if it is typical for US stocks to outperform international equities with less volatility. We also looked at the math for the last ten years. Here’s what we found:
#1 – EEM still lags the S&P 500 relative to performance with almost double the volatility over the past 10 years. From 2009 to 2018, EEM rose or fell by 1% or more on 1,048 days (513 down, 535 up). It’s price return over that period was up 56%. EFA was less volatile with 750 one percent days (367 down, 383 up), but only returned 31% over that time period. By contrast, the S&P 500 was the least volatile with 609 one percent days (287 down, 322 up), and returned 178% from 2009 to 2018.
#2 – EEM has had more one percent days than the S&P 500 every year since 2009. The average over that time frame for EEM: 105 daily returns of up or down +1% each year, or almost 9 days/two trading weeks a month. The average for the S&P is just 61, or around 5 days/one trading week a month. The average 10-year annual returns for EEM and the S&P were +7.4% and +11.2% respectively.
Even though EEM’s extra volatility did not generate better returns than the S&P over the last decade, it has during some years:
- 2009: EEM returned +66.2% vs. 23.0% for the S&P, and had 157 one percent days vs. 118 for the S&P.
- 2010: +14.8% vs. 12.8%, 104 vs. 76 days
- 2012: +16.9% vs. 13.4%, 94 vs. 50 days
- 2017: +34.6% vs. 19.4%, 53 vs. 8 days
#3 – EFA was also more volatile than the S&P each year (except 2018) since 2009, and outperformed just three times. The average number of one percent days a year was 75 for EFA compared to 61 for the S&P, while the average 10-year annual returns were +3.7% and 11.2% respectively.
- 2009: EFA returned 23.2% vs. 23.0% for the S&P, and had 136 one percent days vs. 118 for the S&P.
- 2012: +14.8% vs. 13.4%, 81 vs. 50 days
- 2017: +21.8% vs. 19.4%, 15 vs. 8 days
Bottom line, the S&P has outperformed EEM and EFA with less volatility the majority of the time (60-70%) over the last 10 years. We are not advising against investing in either EEM or EFA, but the decision to do so comes down to you or your client’s risk tolerance. Recent history suggests that EEM typically underperforms the S&P despite nearly double the volatility. EFA is not as volatile as EEM, but the S&P 500 still usually bests its returns with less volatility as well.