Is Non-Correlation Now a Thing?

by | Jun 27, 2017 | ETFs, S&P 500/SPX

Data Source: Morningstar Office 2017 Jan-May

When everything moves in lockstep with one another, alpha generation can be difficult for active managers. Active managers suffer and passive investment strategies become all too easy.

Things have been a little different this year where correlations are not all aligned with one another.

Above in the chart, we ran a correlation matrix including the Sector Spyder ETFs and the S&P 500 Index ETF: SPY. The way to read this is to first look at the list and corresponding numbers on the left hand vertical column. Then to see what its correlation has been to other sectors, compare to the horizontal column numbers across the top.

For example, if you take line 10 Utilities and intersect it with the 6th column (Consumer Discretionary), you would see over the first 5 full months there has been a -0.50 correlation. Financials on the other hand have a positive 0.99 correlation with the S&P 500 ETF when you line up line 5 with column 1. Energy hasn’t shown much correlation to the market nor other sectors thus far. To illustrate how different 2017 is to 2016 you can see below where we ran the same matrix but for the first full 6 months of 2016.

Data Source Morningstar Office 2016 Jan-June

I think you’d agree there is quite a bit more blue (positive correlation) on this graph compared to the most recent one meaning correlation is starting to decline. Non-correlation can be a positive for some investment strategies that look to generate relative outperformance for your clients.

Markets that don’t move in the same direction require selection skill to produce gains in excess of the market.

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