I've taken some of the most commonly referenced indexes and calculated a general comparison of their respective tracking ETFs' behavior over the past 1600 sessions.  All numbers are calculated on daily adjusted log-returns.  Once these first four moments and the Omega measure are calculated, I rank them as optimally desired - increasing mean, decreasing standard deviation, increasing skewness, decreasing kurtosis, and increasing Omega ratio.  Finally, the indexes are sorted by their average rank as shown in the last column.

• DIA: DIAMONDS Dow 30
• IJH: iShares S&P MidCap 400 Index Fund
• IJR: iShares S&P SmallCap 600 Index Fund
• IWB: iShares Russell 1000
• IWM: iShares Russell 2000
• IWV: iShares Russell 3000
• SPY: SPDR S&P 500

Index Ranking

    The results are somewhat surprising and likely due to the equal-weighting of rankings.  Other than the Dow 30 Diamonds, the iShares ETFs seem to take the cake as a whole, with the S&P 600, S&P 400, and Russell 3000 taking the top three spots. 

    I typically watch the CBOE Daily Market Statistics around open, as the balance of derivative positions taken early in the day are often good indicators of morning momentum.  Among the various implied volatility and buy-write indexes on the page, there are two especially to watch - RVX, the Russell 2000 volatility index, and the VIX, the standard CBOE volatility index. 

    Stepping back from this single morning snapshot, however, these two indexes paint an interesting picture of the market this year.  Though the Russell volatility index is a relatively new indicator in the context of long-term index comparison, there still appears to be a sharp dichotomy in its dynamics.

       Note how the overall CBOE market volatility index change is greater on the year than the Russell 2000 volatility - that is, the implied total market volatility represents a higher risk level than the small cap Russell 2000 volatility level.  Though one could argue that the Russell derivative contracts on which the RVX index is based are much less liquid than the respective VIX contracts, both are easily liquid enough to eliminate all but trivial arbitrage. 

    This, however, is in stark contrast to prior behavior of the two indexes.  Up until the February Greenspan R-word incident (the first, I should say), the VIX indicated that the overall market was less volatile than the Russell.  Though the trend was weakening compared to the fall and winter of 2006, the strong market leading up to the end of February still verified this relationship.

    After this market shock and its following correction, the VIX rocketed to nearly 25% above the RVX.  Though the trend is a volatile one, it continuess to hold despite the strong earnings season and M&A activity for large caps. 

      I'd be very interested to hear any arguments for this relationship, either theoretical or technical, and will certainly continue to watch this relationship for a definite change in trend.

    One of the common threads of discussion in the financial community lately has been volatility - where it is now, where it has been, and where it might be soon.  Though yesterday's events certainly caused a spike, the futures this morning seem to indicate that the VIX will likely drop again into the weekend.

    Regardless of what will happen today, I wanted to cover which ETFs, either by asset choice or by asset management, are most affected by the VIX and what it represents.

Below are the twenty most and least correlated ETFs and CEFs to the VIX.

Dollar-Weighted ETF/CEF Category Return

    Here I provide further evidence that the relationship between return and capitalization is a function of underlying market volatility.  I very much intend to raise questions about the supposed evidence that large caps must again outperform small caps, as to propose this without any conditions on risk would imply obvious arbitrage (e.g. short small caps and put the proceeds into large caps for the difference in return).

    Here is a chart of the VIX, S&P 500, and Russell 2000 over the last 3 days.  Notice how when the VIX drops, the difference between the Russell and the S&P grows, and when the VIX gains, the Russell and S&P return to equal levels.

    Though I'm short on time today, I wanted to get this out there, as there have been so many commentaries on the "return of the large caps" lately.  The gist of my argument is that the difference in return between large caps and small caps is strongly and negatively correlated to the VIX.  When the VIX is high, large caps perform at least as well as small caps, but when the systemic volatility is low, investors require a higher rate of return for the greater risk inherent in small cap securities. 

    I'll do formal difference time series analysis when I've got the time, but I think this graph is something of an indicator of validation.

    There are a number of compelling aspects of ETFs.  One is their good match to NAV.  Given the pricing mechanism and liquidity that has developed on the market, few funds trade at non-trivial premiums or discounts to actual asset.  That said, however, there are slight persistent discounts or premia in a number of funds.  Another attribute that makes them favorable to traditional mutual funds is their low load or expense ratio, allowing more of the return to be actually realized for long-term investors.  Lastly, given their open exchange nature, much more information is available at much less cost.

    I wanted to focus on funds that exemplified these factors.  Thus, I have generated a list of funds

1. trading at or below par
2. with below-average expense ratios
3. with more than 100M in assets
4. with no single holding of weight greater than 10%

Here is a table summarizing the 22 resulting ETFs, sorted by increasing expense ratio.