The 10-day moving average of this indicator is 90% and the one-day reading is 91%.

As the printing presses continue to hum, however, the question remains: where will the money go? Policy makers cannot assume it will flow to the emerging markets, the way it did in the 2000s. That was an exceptional decade, when all emerging markets boomed, attracting huge new capital flows. Now the blind optimism about growth in many emerging markets has dimmed, as many face serious structural problems.

Brazil, Russia and South Africa may grow more slowly than the global average over the next few years. However, inflows remain high in some of the more reform-oriented emerging economies such as the Philippines, Thailand and Turkey.

Interestingly, countries—Philippines, Thailand, and Turkey—that he labels as “more reform-oriented emerging economies” are all countries where we have overweights in the PowerShares DWA Emerging Markets Technical Leaders ETF (PIE).

As of 4/1/2013.

These overweights and underweights have had a very positive impact on YTD performance:

Source: Yahoo! Finance

Performance numbers listed above are pure price returns, not inclusive of dividends, all fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.  See www.powershares.com for more information.

HT: Abnormal Returns

Last week’s performance (5/13/13 – 5/17/13) is as follows:

IU.com:In the first four months of 2013, asset gathering for U.S. ETFs was in the neighborhood of $64 billion, and on pace to beat 2012’s record of $188 billion. Are you surprised? Is the sky the limit? How far is this ETF juggernaut going to go?

Dorsey: Well, I don’t think the sky is going to be the limit. I don’t know that there are any more ETFs that anyone can bring out that will be the new fandango. The key word here is a phrase I coined: “ETF alchemy.”

IU.com:ETF alchemy?

Dorsey: Think about this for a second: If I take H₂ and I add O, what do I get?

IU.com:Water.

Dorsey: Yes, water. Each one of those two elements is separate. But when I combine the two, I come up with a substance—water—that you can’t live without. Each one separately is not as good as the two combined. And the concept here is, What’s out there in terms of ETFs I can combine together to make a better product?

Take for instance the Standard & Poor’s Low Volatility Index—and if you add that to PDP, which is our Technical Leaders Index, and combine the two, it’s like taking two glasses of water and pouring them into one bigger glass of water, 50-50. I end up with a better product than either one of them separately.

You’ll find this as we go along: the ability to combine different ETFs to create a better unit where the whole is better than the sum of its parts.

A little later in the interview, Tom Dorsey speaks to just how important the ETF has been to the industry:

IU.com:So that’s really the first ETF.

Dorsey: Yes, and I can’t tell you how many seminars I have taught to professionals on ETFs and the eyes that widen and the lives that change once they understand it and understand how to use it; it tells me we’re on the right path and this is the exact right product.

Like I’ve said to you before, it’s probably the most important product ever created in my 39 years in this business. And I believe back then when I talked to you that we’re in the first foot of a 26-mile marathon.

Dorsey Wright is the index provider for PDP.  For more information, please see www.powershares.com.

Numbers shown are price returns only and are not inclusive of transaction costs.  Source: iShares

The 10-day moving average of this indicator is 84% and the one-day reading is 92%.

Risk is an interesting topic for a lot of reasons, but principally (I think) because people seem to be obsessed with safety.  People gravitate like crazy to anything they perceive to be “safe.”  (Arnold Kling has an interesting meditation on safe assets here.)

Risk, though, is like matter–it can neither be created nor destroyed.  It just exists.  When you buy a safe investment, like a U.S. Treasury bill, you are not eliminating your risk; you are just switching out of the risk of losing your money into the risk of losing purchasing power.  The risk hasn’t gone away; you have just substituted one risk for another.  Good investing is just making sure you’re getting a reasonable return for the risk you are taking.

In general, investors–and people generally–are way too risk averse.  They often get snookered in deals that are supposed to be “low risk” mainly because their risk aversion leads them to lunge at anything pretending to be safe.  Psychologists, however, have documented that individuals make more errors from being too conservative than too aggressive.  Investors tend to make that same mistake.  For example, nothing is more revered than a steady-Eddie mutual fund.  Investors scour magazines and databases to find a fund that (paradoxically) is safe and has a big return.  (News flash: if such a fund existed, you wouldn’t have to look very hard.)

No one goes looking for high-volatility funds on purpose.  Yet, according to an article, Risk Rewards: Roller-Coaster Funds Are Worth the Ride at TheStreet.com:

Funds that post big returns in good years but also lose scads of money in down years still tend to do better over time than funds that post slow, steady returns without ever losing much.

The tendency for volatile investments to best those with steadier returns is even more pronounced over time. When we compared volatile funds with less volatile funds over a decade, those that tended to see big performance swings emerged the clear winners. They made roughly twice as much money over a decade.

That’s a game changer.  Now, clearly, risk aversion at the cost of long-term returns may be appropriate for some investors.  But if blind risk aversion is killing your long-term returns, you might want to re-think.  After all, eating Alpo is not very pleasant and Maalox is pretty cheap.  Maybe instead of worrying exclusively about volatility, we should give some consideration to returns as well.

—-this article originally appeared 3/3/2010.  A more recent take on this theme are the papers of C. Thomas Howard.  He points out that volatility is a short-term factors, while compounded returns are a long-term issue.  By focusing exclusively on volatility, we can often damage long term results.  He re-defines risk as underperformance, not volatility.  However one chooses to conceptualize it, blind risk aversion can be dangerous.