ETF Correlation Study

Over 95% of my trades are using ETFs. I have discussed in the past why I prefer ETFs to individual stocks. One interesting aspect of trading ETF is using trade pairs that have low correlation to each other.

So, looking at the correlation of the S&P 500 sectors against the S&P 500 below we can identify to what extent the instruments the same way. (This is from Portfolio Visualizer which I think has some great tools).

Looking at the top row we can observe and conclude that:

1. Sectors that move the closest to the S&P 500 are: Technology XLK, Industrials XLI, Materials XLB, Consumer Discretionary XLY, Financials XLF and Communications XLC.

   1. The conclusion is if you want to trade any of the 6 sectors in point 1 above you might as well trade the S&P 500 (SPY or SPX).

2. Sectors that move the farthest from the S&P 500 are: Utilities XLU and Energy XLE.

   1. The conclusion is that there could be pair trades one can do where the S&P 500 may be trending one way and the XLU and/or XLE trending the other way.

We could do similar study of the S&P 500 against some commodities:

The above table tells us that aside from Gold GLD and Silver SLV (which is expected) there are no other items that correlate to each other. So, we could look at these instruments as hedge options.

Another study could be for global markets:

We can see that there is very little correlation between the S&P 500 and China FXI or between China and Mexico EWW or Brazil EWZ.

There is always a bull market somewhere.