Sector Correlation
Comparing a 1-year sector correlations matrix versus a 3-year sector correlations matrix across key sectors reveals a trend to more moderate and lower correlations across sectors.
We used the Economatica system to examine correlations across key sectors of the S&P 500 for both 1 year and 3 year periods.
To perform this comparison we chose the Spider Select Sector Group ETFs and used daily observations to generate the matrices.
Our analysis demonstrates that correlations are more moderate and generally lower in the 1 year matrix than in the 3 year matrix. This trend towards lower correlations among key sectors could make a fund manager’s task of diversifying a portfolio easier as sectors have become less correlated with one another.
For the purposes of this analysis and to put our observations into proper context we will define key sectors with a correlation of:
Less than 0.3 as having a low correlation
Between 0.3 and 0.7 as having a moderate correlation
Greater than 0.7 as having a high correlation
In examining the 1 Year Correlations matrix below we made the following observations for 9 key sectors:
XLY, the Consumer Discretionary Sector, is moderately correlated to 4 sectors; is highly correlated to the Industrial, Materials, and Technology sectors; and has a low correlation to XLU.
XLP, the Consumer Staples Select Sector, is moderately correlated to all sectors.
XLE, the Energy Select Sector, is also moderately correlated to all sectors except XLU, where there is a low correlation value of 0.02.
XLF, the Financial Select Sector, is moderately correlated to 6 sectors; has a high correlation value of 0.75 with the Industrial sector; and has a negative correlation value with Utilities, of (0.08).
XLV, the Health Care Select Sector, is moderately correlated to 7 sectors; and has a low correlations value of 0.22 with Utilities.
XLI, the Industrial Select Sector, is highly correlated with 4 sectors, among these are Consumer Discretionary, Financial, Materials, and Technology sectors; is moderately correlated to 2 sectors; and, again, like most of the other sectors, a low correlation with Utilities.
XLB, the Materials Select Sector, is highly correlated to the Consumer Discretionary and the Industrial sectors, with values of 0.73 and 0.81, respectively; and is moderately correlated to 5 other sectors; and has a low correlation again with Utilities.
XLK, the Technology Select Sector, is also highly correlated to the Consumer Discretionary and the Industrial sectors and their values are 0.73 and 0.70 respectively.
XLU, the Utilities Select Sector, has the lowest correlation values with all sectors except the Consumer Staples sector, where it has a moderate correlation value of 0.38.
