Wednesday, June 25, 2008

ETF and Index Correlation Study for 2007 and 2008

Following the note on June 13, I performed a new correlation study for several ETFs and Indexes. This study has a new twist. It examines how correlation varies over time.

The study shows the correlation between pairs of symbols. For example, the correlation between gold (through GLD) and oil (through USO) was -.18 in Q207, 0.91 in Q3 07, 0.92 in Q407, 0.73 in Q108, and -.25 in Q208. Numbers close to 1.0 and -1.0 indicate correlation (positive and negative), while numbers close to 0 indicate a lack of correlation.

These numbers are very useful to see the current correlations, to observe correlation cycles, and for hedging and diversification.

These correlation values have been plotted in two different graphs below. Q2 2008 data includes up to June 18. The spreadsheet used is also available for download here.

(Click on images for larger version)

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