blog

Latest from the Quantamize Blog

Silver Is More Correlated With US Dollar Than Other Commodities! A Multi-Asset AI Cluster Analysis

May 28, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • We applied a clustering analysis to our multi-asset ETF portfolio just to get an idea the relationships between these ETFs
     
  • Remember, our multi-asset ETF portfolio is based on hierarchal risk parity, which looks for non-linear relationships when running its optimization scheme
     
  • We decided to use an Affinity Propagation model to visualize the different clusters

 

We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.
We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.

 

 

  • While it is not shocking to see the iShares MSCI Emerging Markets ETF (EEM) and the iShares China Large-Cap ETF (FXI) cluster together, we are shocked at the iShares Silver Trust (XLC), which seems to be independent of other metals ETFs.
     
  • SLV does exhibit a strong relationship with the Invesco DB US Dollar Index Bullish Fund (UUP).
     
  • A weaker dollar is usually associated with lower interest rates, which historically have been a factor in the strong prices of silver and gold.
     
  • Speaking of Gold, it is clustered in with the other Metals Funds which is not surprising given the large beta exposure of those general metals funds to Gold.
     
  • Notably, it looks like the three European stocks ETFs in our study are relatively disconnected from US stocks.
     
  • Would have expected strong relationships there.
     
  • Funny to see the iShares MSCI Japan ETF (EWJ) have a stronger relationship with European ETFs than it does with the US ETFs.
     
  • Final Takeaway: We have created a fairly diversified multi-asset portfolio with these ETFs, though it might make sense to consider dropping individually commodity ETFs for one single one.
     
  • You may not really be creating real diversification by simply incorporating seemingly unrelated asset classes.

 

Affinity Propagation Clustering of Multi-Asset ETFs

Affinity Propagation Clustering Chart


 

Cluster Tickers in Cluster
Cluster 1  Invesco DB Agriculture Fund
Cluster 2  Invesco CurrencyShares Euro Trust, iShares Silver Trust
Cluster 3  iShares Short Treasury Bond ETF
Cluster 4  Invesco DB Base Metals Fund, iShares MSCI Emerging Markets ETF, iShares MSCI Japan ETF, iShares MSCI United Kingdom ETF, iShares MSCI Eurozone ETF,
SPDR EURO STOXX 50 ETF, iShares China Large-Cap ETF, iShares iBoxx $ High Yield Corporate Bond ETF, iShares Russell 2000 ETF, Invesco QQQ Trust,
SPDR S&P 500 ETF Trust, United States Oil Fund LP
Cluster 5  iShares iBoxx $ Investment Grade Corporate Bond ETF, iShares 20+ Year Treasury Bond ETF
Cluster 6  United States Natural Gas Fund LP
Cluster 7  Invesco DB US Dollar Index Bullish Fund

 

 

Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS
Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS