QVM Group

International ETFs: Correlations with Broad U.S. Market

Simon,

Here's the story on the correlations.

First, the language on the site tool on which I based my belief that Barclay's is correlating returns as they should be is shown below. I have no reason to believe that they did the math incorrectly -- it's just the data on which they calculate that should reasonably be questioned.

"Correlation: A measurement of how closely a portfolio's performance correlates with the performance of a benchmark index, and thus a measurement of what portion of its performance can be explained by the performance of the overall market or index. Readings for correlation may range between -1 and +1, where +1 means perfect positive correlation and -1 means perfect negative correlation."

Second, I took the position as the #1 ETF sponsor in the world with enormous credibility at risk by offering the tool in their "financial professional" section of their site, they would have validated their methodology. However, you correctly note that State Street numbers vary. I have previously discovered and published a report indicating that the State Street site which does not correlate returns (they correlate prices only – verified by phone contact with State Street) and therefore is not useful for my purposes or relevant to the correlation focus of this article.

Third, I did not recalculate by hand on my own, but I did contact the Barclay's wholesaler division to verify their methodology. I gathered information from two wholesalers after telling them about the challenge to my published numbers, about the difference between their numbers and those from State Street, and how the State Street tool does not correlate returns. They assured me that the Barclay's tool correlates returns not prices, and I am confident that their math formula must be right.

Therefore, I rest comfortable that the numbers are correct. If the 1-year numbers look funny, it may be the shorter time intervals produce result less in step with numbers from longer periods of time.

I encourage you to do some manual calculations with the Yahoo data source and Excel method listed in my other correlation article. etf.seekingalpha.com/a...

If numbers you calculate contradict the figures from Barclay's we can take it up with them at another level. If you would like to call them yourself, they can be reached at 800-474-2737.

State Street numbers are irrelevant for the purposes of this article and should be ignored. As for PortfolioScience.com, I cannot comment, because I do not have access to their tool and did not sign up for their free trail.

As a practical matter, virtually all of the data we use in investment decisions is provided by somebody who we rely upon to use reasonable care – correlations, portfolio statistics, even basic things like prices and dividends, and of course narrative reports and news. We live in a complex world that requires that we rely on each other and we cannot do everything from the ground up individually. This is one of those cases. I’m going to go with the assumption that the #1 ETF company with a portfolio construction tool based in part on correlation has been developed properly and with care. If someone can show me a specific error in their tool, I will change, but until then, life is too short.

I appreciate you comment and the fact that you caused me to voice verify the Barclay’s methodology with their staff.