Investments whose potential rewards outweigh their risks are hard to find, but they exist. If the usual financial gauges aren't generating worthwhile options, consider using a different yardstick: the Sharpe ratio. It's the classic measure of risk and return developed by Nobel laureate William Sharpe in 1966. To calculate a fund's Sharpe ratio, take its return and subtract the "risk-free rate," the theoretical return on securities with no default risk, such as short-term Treasuries. The difference is then divided by the fund's standard deviation, a volatility measure that reflects how far returns stray from past averages. The 10 exchange traded funds below have Sharpe ratios of 1 or more. Seven of them hold A-plus grades from TheStreet.com Ratings. With the stock market on the fritz, the Sharpe ratio favors fixed-income and currency funds. The SPDR Barclays Capital Intermediate Term Treasury ETF ( ITE), which has returned 7.3% in the past year, had the highest Sharpe ratio. The fund tracks an index of fixed-rate, non-convertible Treasuries with at least one but no more than 10 years until maturity and at least $250 million in outstanding face value. The index excludes special issues, such as Treasury inflation-protected securities, or TIPS.
10 ETFs With High Sharpe Ratios
Fund (Ticker) Rating
Total Return 1 Year
SPDR Barclays Capital Intermediate Term Treasury ETF (ITE) A+
iShares Barclays 1-3 Year Treasury Bond Fund (SHY) A+