Geoff Considine

36-Month ETF Correlations with Russell 3000

Guys:

The real lesson here is to be very careful of what you are looking at. Portfolio risk is determined by the standard deviations in return on each asset and the correlations between them. Price correlation is related to return correlation, but it is a step away. When portfolio management discusses correlation it is correlation in return. There is also a deep econometric root for this. If you correlate prices, any two things with a trend over the sample period will appear correlated, whether or not they are. It is, in fact, very easy to get spurious (i.e. accidental) correlation between any two processes with a lot of 'memory'--such as price series. This has been analyzed and tested extensively in regression and statistical research--in fact I did some of this myself when I was a research stats guy. For these reasons, you need to look at returns and correlations between returns if you want to diversify effectively.

GC

Choosing the Right ETF: Growth Versus Value in Asset Allocation

As an added aside, John Bogle and Burton Malkiel have an Op Ed piece in the NY Times about the Value vs. Growth issue with regard to 'fundamentally weighted' funds. In this article, they update the statistics that I cite through 2002. They state that from 1937 through May 2006, the average annual return of growth funds is equal to that of value funds to within 0.03% per year.