Exploring the Correlation Between Crude Oil Prices and ETF Performance: A Predictive Analysis Using Crude Oil Index

This paper investigates the feasibility of using crude oil prices to forecast the future performance of major Exchange-Traded Funds (ETFs) using data spanning from January 1, 2000, to June 1, 2024, which can have a significant impact on investment choices and portfolio management. The chosen ETFs include SPDR S&P 500 ETF (SPY), iShares MSCI Emerging Markets ETF (EEM), iShares MSCI Australia ETF (EWA), iShares MSCI Canada ETF (EWC), iShares China Large-Cap ETF (FXI), and Vanguard FTSE Europe ETF (VGK). The study comprises two main analyses: firstly, investigating the relationship between the Dow Jones Industrial Average Crude Oil Index and various ETFs; secondly, utilizing a predictive trading strategy with crude oil futures to predict ETF returns. The results indicate a notable inverse correlation between crude oil prices and ETF returns, suggesting that as crude oil prices increase, ETF returns tend to decrease. Moreover, the predictive strategy showcases significant annualized returns and favorable risk-adjusted performance, indicating that trading based on crude oil futures can lead to consistent profits. These findings offer valuable insights for both investors and policymakers, emphasizing the potential of crude oil prices as a predictive factor for ETF performance. By integrating crude oil price movements into their strategies, investors can improve their portfolio management and make more informed investment choices.