One of the powerful aspects of the IWM/GDX robot is that their correlations to the markets are relatively low, compared to other alternatives. This permits one robot to be long while the other is in cash, or short, as the markets dictate.
I think the consideration of any other robot has to start with correlation to the other existing robots. To me, and I know this is against the grain here, creation of a SPY robot will duplicate much of the in/out market behavior of the IWM robot, so I fail to see the point (completely ignoring that Pascal has already done this through May 2011 and the results underperformed the IWM robot).
To throw my 2 cents into the pool, I submit the following chart:
Attachment 8596
This is a correlation matrix of the various indexes with IWM, GDX, and various ETFs from the Oil & Gas group. This is a correlation back over the past 2 years of data.
Here are the symbols, in case you are not familiar with Yahoo!:
^DJI: DJ 30 Industrials
^GSPC: S&P500
^RUT: Russell 2000
^IXIC: Nasdaq 100
Two equities are said to be correlated when they have a value of "1.0". There is no correlation when they have a value of "0.0", and there is inverse correlation when they have a value of "-1.0".
As you can see, over the long haul, IWM and GDX have a correlation value of 0.4 to each other, e.g., they are loosely correlated. This gives them the ability to have different behaviors, which is why we are long GDX at the present time but looking for a short entry into IWM.
You can read across the IWM row and see that IWM is tightly correlated with the general markets (0.87, 0.92, 1.00, 0.94). Contrasting, GDX is not (0.39, 0.41, 0.41, 0.35).
I think that this is a desireable behavior of a robot, and I think that if time and effort are going to be spent, we need to find another ETF that is not well correlated with IWM or GDX.
Enter XOP.
XOP is the Oil and Gas Exploration & Production ETF, and it has solid volume. It's correlation with IWM is 0.72 and with GDX only 0.56, so again, it's a loosely-correlated candidate. Further, it's correlation with the major markets is loosely correlated (0.67, 0.73, 0.73, 0.67).
Another attractive aspect of XOP is that it has two levered ETFs, DIG and DUG. The correlations with XOP are very, very close.
I've included OIL, another ETN (Note, not Fund), only as a reference. ETNs have tax consequences, so while it can provide further orthogonality, the practical nature of OIL in terms of taxes and subsequent K1's may preclude it from consideration.
Correlations change with time -- I can model this using a weighted methodology developed by the RiskMetrics Group. If we consider approximately on the last 100 days of data (or so), here's the correlation matrix:
Attachment 8597
Note how there is a tighter correlation across the board with the various components, as well as with the major indices.
Taking this to the extreme, the correlation across the last 30 days of data (or so) produces the following:
Attachment 8598
The implications are subtle -- sometimes market conditions rotate so that previously orthogonal ETFs are out of sync, as desired, and sometimes the markets rotate so that they become more in sync. We could find ourselves completely out of the market with a IWM, GDX, XOP robot triad, or we could find ourselves in the markets.
Again, my 3 cents (inflation)...
Regards,
pgd
Originally Posted by grems8544
One of the powerful aspects of the IWM/GDX robot is that their correlations to the markets are relatively low, compared to other alternatives. This permits one robot to be long while the other is in cash, or short, as the markets dictate.
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