iShares Dow Jones US Basic Materials (IYM)

All Comments on IYM

  • commenter
    Suna Reyent
    Mar 08 04:29 AM
    In Search of Low (or Negative) Correlation Between Asset Returns [view article]
    Hi,
    Thank you for all comments. Firstly, I wanted to make the article accessible and intuitive rather than a scientific treatise, I'm aware that every serious econometrician or statistician who is involved with portfolio theory will strictly look at asset returns and not even bother with the actual prices. I wanted to put these up to show the logic behind that and show the differences between the two.
    Secondly, I'm aware that market concerns itself with forward-looking information, however the supposedly "forward-looking data" you put in your black box models are called "begging the question" in philosophy. That is, by the very action of putting in your "forward-looking data", you're already making predictions about the future so all these "black box" models are nothing more than glorified astrology to me. In other words, it is another version of Descartes' famous proof of the existence of God, but the assumptions he makes to come to that conclusion already presuppose what he's trying to prove, and hence the famous "Cartesian Circle" in philosophical terms.
    My article does not imply that future will resemble the past, I've already stated that in the end if you read the article thoroughly.
    I'm saying that a simple understanding of how correlation works will lead people to make more intelligent decisions about stock and etf ownership. And I'm showing historical data to support that idea, because I just don't think it is appropriate to show "forward-looking data" to support what I'm trying to prove, however I'm aware that's what the financial industry does.     Reply
  • commenter
    Geoff
    Considine
    Mar 07 02:03 PM
    My Website
    In Search of Low (or Negative) Correlation Between Asset Returns [view article]
    Sir:

    Your article mirrors many of the themes in my articles on Seeking Alpha. There are, however, a few important issues that I would like to raise. First, correlations between prices (as I understand your trend) are not a good basis for planning. There are a range of econometric / statistical reasons for this. Things with serial correlation in time (like prices) will often exhibit spurious (i.e. accidental, transient) correlations between them (like correlations between stock prices). Looking at returns removes this issue. The other important thing is that in order to plan, you need forward-looking estimates of portfolio risk and return. Your article seems to imply that investors can use historical data to get to a good asset allocation. They can't. Bernstein (in The Intelligent Asset allocator) deomonstrates the incredibly bad results you will end up with if you do asset allocation using a Mean-Variance Optimization and historical data. My point is that the problem is harder than you seem to suggest--you need a FORWARD view: you can't do asset allocation just b looking in the rearview.

    In other words, I agree 100% that correlations are an important input to portfolio planning. I also agree and have pointed out a number of times that foreign indices provide much less protection than people think because the correlations can be quite high (as you show).     Reply
  • commenter
    billb
    Mar 07 10:50 AM
    My Website
    In Search of Low (or Negative) Correlation Between Asset Returns [view article]
    Great and timely article. I've been giving this some study time over the last few months. It's taken me probably longer than it should've to come to the conclusion that your statement "Which brings us back to the basics of investing, that those seeking higher returns will have to bear higher risks" is just plain true. There are no shortcuts in the market since someone else is always on the other side of the trade.

    Something I'm studying next is going a little bit against conventional theory with regard to minimizing volatility and maximizing return. The basis of the idea is to find very volatile asset classes such as emerging markets, commodities and small/micro cap stocks. All of these will be ETFs to eliminate the fear of total loss. Based on my preliminary studies, while many of these asset classes over the last few years have been performing well (with positive correlation), some clearly outperform others in various timeframes. The increased volatility helps to better identify rebalancing points.

    For example, the beginning of 2006 was a bit rough for small cap stocks and the U.S. indices in general. Meanwhile, commodities were still charging ahead. The deviation reverted to mean as commodities flattened and stocks began running up around June. The deviation between these two asset classes was fairly clear and a rebalance would've worked wonderfully. I've found a few of these deviations over time in other asset classes. So here we have no big crash, but a great opportunity to rebalance. Choosing higher volatility is a way to hopefully get a larger deviation (prompting a rebalance) and better returns over time (ex: a portfolio of small caps will generally outperform the blue chips over time).

    With regard to when all assets crash, I've come to accept that this is just inevitable and really represents a buying opportunity across all asset classes. All asset classes bombed with the exception of bonds. If one was 50/50 (bonds, stocks, let's say), you would've dramatically underperformed and 50% of your portfolio would've still taken a hit. I don't see the benefit of being in "less risky" asset classes.

    I don't think this idea is going to help anyone's ulcer or someone who can't accept a big hit in the short term, but may be a better way to help the "buy low/sell high" side of the efficient portfolio theory.

    Thank you for the article.     Reply
  • commenter
    Suna Reyent
    Mar 07 10:26 AM
    In Search of Low (or Negative) Correlation Between Asset Returns [view article]
    Hi,
    The "Trend" is the index itself, or in the case of commodities, the actual futures price. I just had to differentiate betwen the index and its daily (or monthly) returns.     Reply
  • commenter
    ETF Wanderer
    Mar 07 09:56 AM
    My Website
    In Search of Low (or Negative) Correlation Between Asset Returns [view article]
    Quick question: how do you define "Trends" which you used in correlation between trends - is it YoY return or something similar ? Reply
  • commenter
    bhattathiri
    mp
    Feb 17 08:13 PM
    Sector Momentum in Materials, Transportation [view article]
    Will Indian market capitalisation surpass all. Reply
  • commenter
    Richard Kang
    Feb 07 09:26 PM
    My Website
    Comparing Base Metals ETFs [view article]
    DT: Click above on "More articles by Richard Kang" and you'll find my email address. Send me an email and I can reply back with the contact name/info for a leading market maker in Europe for these products and will likely be able to help you. Reply
  • commenter
    d_teller
    Feb 07 08:31 PM
    Comparing Base Metals ETFs [view article]
    About 2 mos. ago, I went to the site that listed the ETC's for info ...but it was clearly stated that they were not available to U.S. purchasers. They really appealed to me because they are not highly correlated to the US ETF's that have commodity futures, and they weren't the shares of the companies that produce/market commodities, but rather small sectors of e.g., basic metals, grains, etc., which may be underweighted in the Energy heavy GSCI. They didn't have an active or rotational or contango etc. cost built in. I'd rather buy corn & aluminum than 50% oil. I don't fancy myself a futures/options trader glued to my PDA/Blackberry. Maybe with the NYSE beginning to broaden its reach, the SEC will approve these ETC's (vis-avis ETN's) for U.S. purchasers. One can hope. Thanks for the head's up. Reply
  • commenter
    Richard Kang
    Feb 07 12:54 PM
    My Website
    Comparing Base Metals ETFs [view article]
    Thanks Roger Reply
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