Diversification with ETFs (update)

This updates the data on a previous analysis of ETF correlation with the FTSE 100 Index.

The following chart shows the 40 ETFs with the highest trading volumes on the LSE and their correlations with the FTSE 100 Index. The ETFs are ranked by the correlation value; the ETFs at the top of the chart have the closest correlation with the FTSE 100 Index.

Correlation of the 40 most traded ETFs with FTSE 100 Index

Notes:

As might be expected the FTSE 100 tracker ETFs are at the top of the above ranking – led by the Vanguard ETF [VUKE].

Rather surprisingly second in the ranking is iShares MSCI World Acc [SWDA], which invests in a broad range of developed companies, but the UK weighting in the ETF is only 7.5%. This ETF has a higher correlation with the FTSE 100 Index than the iShares FTSE 100 [ISF].

Also near the top of the ranking are iShares MSCI Europe Ex-UK [IEUX] and iShares S&P 500 [IDUS].

Most surprising perhaps is the higher ranking of iShares MSCI Emerging Markets [IDEM and IEEM].

In summary, don’t expect much diversification (away from the FTSE 100) by investing in any of the above.

The gold ETFs (Source Physical Markets Gold P-ETC [SGLD], Lyxor Gold Bullion Securities Ltd [GBS] and ETFS Physical Gold [PHAU]) are ranked near the bottom – their correlations are low, albeit not negative.

For maximum diversification away from the FTSE 100, an investor needs to look at the bottom of the list – namely the gilt and T-Bond ETFs (iShares FTSE UK All Stocks Gilt [IGLT] and iShares USD Treasury Bond 7-10 [IDTM]).


Extract taken from The UK Stock Market Almanac.

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Diversification with ETFs

The following chart shows the 40 ETFs with the highest trading volumes and their correlations with the FTSE 100 Index. The ETFs are ranked by correlation; the ETFs at the top of the chart have the closest correlation with the FTSE 100 Index.

Correlation of the 40 most heavily traded ETFs with the FTSE 100 Index_bNotes:

  1. The iShares World, S&P500 and Emerging Markets ETFs are grouped at the top of the table; so don’t expect much diversification away from the FTSE 100 Index by investing in these.
  2. For proper diversification away from FTSE 100 Index investors need to look at the bond ETFs at the bottom of the table.

 

 

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Most traded ETFs – first two months of 2014

The following table shows the LSE-listed ETFs with the greatest average daily trading volume for the last two months (the rank, for comparison, for the last six months is given in the second column).

Rank(2m) Rank(6m) ETF TIDM
1 1 iShares FTSE 100 ISF
2 2 iShares Markit iBoxx Euro High Yield Bond IHYG
3 3 ETFS Physical Gold PHAU
4 10 Source Physical Markets Gold P-ETC SGLD
5 7 iShares Markit iBoxx $ High Yield Bond IHYU
6 12 iShares MSCI Emerging Markets IEEM
7 11 iShares V PLC – iShares MSCI Japan Monthly EUR Hedged IJPE
8 13 iShares MSCI Emerging Markets IDEM
9 9 iShares FTSE 250 MIDD
10 4 iShares S&P 500 IUSA
11 14 iShares MSCI World IDWR
12 6 iShares JPMorgan USD Emg Mkts Bond IEMB
13 18 Vanguard S&P 500 ETF VUSD
14 8 iShares S&P 500 IDUS
15 16 iShares MSCI World IWRD
16 20 Vanguard FTSE 100 ETF VUKE
17 19 iShares MSCI Europe Ex-UK IEUX
18 5 Lyxor Gold Bullion Securities Ltd GBS
19 15 iShare $ Investop Corp Bond Fund LQDE
20 23 iShares MSCI Japan Monthly GBP Hedged IJPH

Trading volumes have increased for emerging market and Japan ETFs in the first two months of the year relative to the previous six months; while volumes have fallen for S&P 500 ETFs.

 

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