FFI Perspectives

Fossil Free Indexes US — Inside the Numbers: Part II

In a prior post I noted that comparisons between the performance of the FFIUS and the S&P 500 are inevitable. We conducted tests to provide comparative performance information. As I previously noted, our testing showed that the average daily returns of the two indexes were statistically indistinguishable when looking back over the last ten years.

However, to understand relative performance fully, we need to consider more than just return. If return were the only difference among investment alternatives, then every investor should simply hold the investment with the highest return.

Unfortunately, we don’t know which investment will have the highest return beforehand; we will know that only after the fact.

This uncertainty about what will be an investment’s realized return (and how that return will rank compared to other investments’ future realized returns) is called risk.

Risk is the rest of the comparative performance story. We care about risk, because we hope that with an understanding of risk we can take better actions, even if we can’t eliminate the risk by those actions.

In our tests comparing the risks of the FFIUS and the S&P 500, we looked at risk in several different ways. Certainly it is not required that if two indexes have very similar returns over a particular interval of time, then they will also have very similar risks over that time interval.

The most commonly used measure of risk is the variance. The variances of the two indexes were statistically indistinguishable. This was true not only for the entire ten-year test period, but for each of the three sub-periods we examined.

The correlation between the returns of the two indexes (the tendency for above or below average returns to occur simultaneously) was greater than 0.99 over the entire period and in each of the three sub-periods (the maximum value a correlation may take is 1.0 and the minimum is -1.0).

Other measures meant to capture different aspects of risk, such as skewness, kurtosis and maximum drawdown were also quite similar between the two indexes.

In sum, viewed both from return and risk, the FFIUS and the S&P 500 bear a remarkable similarity during the ten-year period and all three sub-periods covered by our tests.

Leave a Reply