Stocks With High Correlation To S&p 500

Research and data analysis past

Ashley McKillips
.

Nosotros all want rewards without take a chance. While this is impossible in investing, the goal of diversification is to move in that direction. A balanced investment portfolio, in theory, offers increased growth while minimizing the potential for loss. One of the best ways to practise this is by examining the correlation between various assets and allocating your portfolio appropriately, incorporating uncorrelated—and even negatively correlated—assets.

A traditional portfolio does this by balancing stocks with bonds. While bonds don't unremarkably offer impressive returns, they're lower risk than stocks and tend to move in opposite directions. This tin can help minimize loss in the issue of a market downturn.

Billionaires, large institutional investors and hedge funds have been using this tactic for centuries, only now simply almost anybody can starting time taking advantage of these benefits with new platforms that make alternatives more accessible to retail investors.

One of the first steps to creating a balanced portfolio with culling avails is figuring out how they correlate with the stock market and each other. In this written report, we determined the correlation betwixt 17 popular alternative assets and the stock market, as measured by the S&P 500. We outlined the avails with a strong correlation and moderate correlation every bit well as those that are uncorrelated and negatively correlated.

• Avails with the strongest correlation to the S&P 500 were robo advisors, real estate, sports cards, farmland, silver, and most popular cryptocurrencies, including Bitcoin
  
  
  and Ethereum.
• Wine
  , golden, crude oil, and platinum all were moderately correlated with the S&P 500.
• Bonds and fine fine art were shown to be negatively correlated to the S&P 500.
• Investment-grade wine and art move in opposite directions.
• Correlation between major cryptos was potent, except Ripple (XRP), which was only moderately correlated to the rest of the coins included in this study.

Correlation between 2 assets is measured using a mathematical formula that produces what is chosen the Pearson correlation coefficient, represented by R. This correlation coefficient can range from -1.0 to 1.0.

A positive number represents a positive correlation, meaning the assets tend to move in the same direction—a 1.0 is a perfect positive correlation. A negative number represents a negative correlation, meaning the avails are inversely correlated or tend to movement in opposite directions—a -1.0 is a perfect negative correlation. Finally, a correlation coefficient of zero represents no correlation. This means that the two assets move independently and have no relationship with each other.

In reality, a correlation coefficient of exactly 1.0, -1,0, or null is extremely rare, and a correlation coefficient that is close to zero nonetheless means there's little to no correlation. For instance, a correlation coefficient of 0.1 is low enough to suggest that whatever slight correlation establish is likely coincidental and non an indicator of whatever real correlation. For the purpose of this study, hither is how we ascertain correlation using the correlation coefficient:

• 
  Strong positive correlation:
  0.75 to 1.0
• 
  Moderate positive correlation:
  0.50 to 0.75
• 
  Depression positive correlation:
  0.25 to 0.50
• 
  No correlation:
  -0.25 to 0.25
• 
  Low negative correlation:
  -0.25 to -0.50
• 
  Moderate negative correlation:
  -0.50 to -0.75
• 
  Strong negative correlation:
  -0.75 to -1.0

The Pearson correlation coefficient in this written report is calculated on a monthly basis from 2018 to 2021 with the exception of

farmland

and

art
, which are calculated on a quarterly basis. Well-nigh of the assets we studied had a positive correlation to the S&P 500 over this time period. All the same, there were ii with a negative correlation.

• Crypto (Bitcoin, Ethereum, Dogecoin, Cardano, and Solana)
• Argent
• Robo advisors
• Sports cards
• Existent manor
• Farmland

Most investment assets are correlated with the stock marketplace. Strongly correlated avails—those with a correlation coefficient of 0.75 or greater—tend to follow stock market patterns. While that doesn't necessarily mean they aren't great diversification tools for other reasons, it does hateful that they might non offer as much recession protection as other asset classes.

Robo advisors

Of those,


robo advisors


predictably had one of the highest correlation coefficients at 0.9345. This is anticipated, considering robo advisors sell funds and indices that aren't too dissimilar from the S&P 500. Nearly investors using robo advisors are doing so to invest in the stock market. Information for robo advisor performance was pulled from our own proprietary robo advisor index. Our platforms include the nigh well-known robo advisors, such as Betterment, Wealthfront, Acorns, SoFi, Personal Capital, Vanguard's Digital Advisor, Schwab'south Intelligent Portfolios, and Wells Fargo's Intuitive Investor.

Real estate

Real estate'southward correlation coefficient was an even higher 0.9636, coming in every bit the most correlated alternative asset. This also makes sense, as real estate performance data came from Vanguard Real Manor Index Fund Admiral Shares (VGSLX), a publicly-traded index that invests in existent estate investment trusts (REITs). This supports the hypothesis that, unlike direct real estate investment, REITs motility closely with stock market patterns and thus aren't always the all-time way to diversify outside of stocks.

Considering these REITs are publicly traded on the same markets equally equities, they tend to be subject to the aforementioned factors that cause stocks to move upwardly and down. However, private and non-traded REITs can be largely uncorrelated to stocks. For example, the eREIT offered by


Fundrise

, which is a non-traded REIT, is significantly less correlated to the S&P 500 than its publicly-traded counterparts such every bit Vanguard's REITs.

Most crypto

Crypto was measured by the performance of Bitcoin, Ethereum, Dogecoin, Ripple, Cardano, and Solana. Bitcoin was simply behind robo advisors and real estate in terms of stock market place correlation, with a very loftier correlation coefficient of 0.9175. Ethereum was rather high every bit well, while smaller altcoins similar Dogecoin (0.8338)  and Cardano (0.8849) had a slightly lower correlation coefficient.

Ripple


(XRP) and Solana were notably less correlated with stocks than the other cryptocurrencies we looked at, with an almost moderate correlation coefficient of 0.7738 and 0.7709 respectively. It's worth noting that Ripple was delisted from many centralized exchanges making it a bit more difficult to trade than other cryptocurrencies included in this report.

At the fourth dimension of this report, all of these cryptocurrencies are in the elevation 12 crypto coins by market place cap and are generally available on centralized exchanges. Emerging coins with much smaller market caps and those that are more than difficult to buy and sell on centralized exchanges may not exist as highly correlated with stocks.

Silver, sports cards, and farmland

Finally, silvery,

sports cards
, and farmland all have positive correlation coefficients of over 0.75. This may seem surprising for alternative assets—particularly farmland, which is often seen as a safe-oasis nugget during times of economic crisis. While it does hold a fairly high correlation to stocks, farmland has besides historically been far less volatile than the stock market place.

• Golden
• Wine
• Rough Oil
• Platinum

Assets with a moderate correlation to the stock market—a correlation coefficient betwixt 0.50 and 0.75—yet bear witness a notable degree of correlation. While they might not move in tandem with stocks quite every bit closely as the assets above, they still tend to follow similar patterns.

Golden and platinum

Precious metals have long been used as a hedge against inflation and a store of value. Based on the past three years, gold and platinum seem to exist viable options.

Golden'south correlation with stocks is complicated. While there have been times when the toll of

gold has held potent

during bear markets, the asset's price often declines sharply at the get-go of a stock market decline. This happened at the beginning of the 2020 coronavirus pandemic, during an equities downturn at the end of 2018, during the financial crisis of 2008, and during the dot-com bubble in 2001. However, according to primary golden strategist for the SPDR ETF George Milling-Stanley in an


interview with ETF.com

, gold bounced back within a week each fourth dimension (much more apace than equities), largely due to it being cashed in by investors who bought equities on margin to cover their losses. "…rather than selling their equities in order to encounter the calls for additional margin," says Milling-Stanley, "they sell something that has held its value, which at that point is gilt. …as soon as equities stabilize, normally at lower levels, they will tend to buy their gold back."

Platinum

, on the other manus, is an under-discussed nugget that has get increasingly interesting for investors in recent years. Used mainly in cars and jewelry, platinum distinguishes itself from gold due to the fact that it is both more than useful and rare than gold. Gilt and platinum also accept a low positive correlation to each other of 0.5432, showing that while the 2 avails move similarly with regard to the S&P 500, they don’t motility as closely together.

Crude oil

Crude oil and the S&P 500 have a correlation coefficient of 0.6406, making oil a moderately correlated asset also. In fact,


commodities


in full general tend to be less correlated with the stock market and great diversification tools for a stock-heavy portfolio. That said, they don't generally trend upwardly over the long term the way stocks do, so they're oft used for short-term growth or long-term wealth preservation.

Assets with a negative, or changed, correlation to the Due south&P 500 move in contrary directions from the stock market place. While uncorrelated assets tin aid preserve wealth, the point of inversely correlated assets is to help your portfolio continue to grow when stocks are down.

Bonds

Bonds accept long been a useful tool for balancing a portfolio because they're considered low-risk and tin can help reduce losses. Our report plant that with an changed correlation to stocks (at a correlation coefficient of -0.3380, bonds can not only aid reduce the risk of loss but may actually help recoup some losses in a market downturn.

This outcome is magnified when investors who are wary of an impending recession run to Treasury bonds as a safe haven, therefore increasing bond prices. As with most inversely correlated assets, however, bonds don't offer impressive returns, particularly when the market is doing well. So while property some pct of assets in bonds can help pad a stock-heavy portfolio, shifting too many assets into bonds tin can diminish long-term returns.

Fine art

Art

came out as the most negatively correlated asset, with a correlation coefficient of -0.6350. Our study used a combination of Artprice Global Indices that cover investment-grade fine art from diverse mediums and fourth dimension periods. Then while


blue-chip art


may offer increased returns when stocks are falling, this doesn't mean that all fine art volition.

There were likewise interesting findings in regards to the correlation between various alternatives.

Wine and art move in completely opposite directions, which is surprising considering both derive their value primarily from the same quality: reputation. What's more than, one might look the market for investment-form fine art and investment-course fine wine to have a lot of overlap.

For investors who primarily invest in stocks via robo advisors, information technology's worth noting the deviation in correlation betwixt robo advisors and culling assets versus the S&P 500 and alternative assets. For example, crude oil is slightly less correlated with robo advisors than it is with the S&P 500. Also, robo advisors and art concord a moderate positive correlation fifty-fifty though art was shown to be negatively correlated with the S&P 500.

Finally, the correlation across diverse cryptos might be important to crypto investors looking to diversify their coin holdings. Bitcoin and Ethereum, possibly unsurprisingly every bit the two biggest cryptos, are almost perfectly correlated. Bitcoin is too strongly correlated with Cardano, Dogecoin, and Ripple, with Ripple being the least correlated of the three. The only money that didn't agree as potent a correlation to Bitcoin was Solana, although at a correlation coefficient of 0.766, the 2 are notwithstanding positively correlated.

Our study pulled historical returns on 17 unlike popular alternative assets using price data pulled from Yahoo! Finance and various indices that track the performance of a specific nugget. Some of these indices are created by external sources (such as Artprice for art and Live-ex 100 for wine) while others were created using proprietary MoneyMade data (such equally the robo advisor index).

Information technology's worth noting that some of these indices might non provide an accurate indication of the asset class'due south overall correlation to the stock market. For case, for real estate, we looked at the correlation between the S&P 500 and Vanguard real estate alphabetize fund VGSLX. While this may help REIT investors decide correlation data, it will be less accurate for those directly invested in existent estate.

As stated in the kickoff of the article, assets were correlated on a monthly basis from October 2018 to December 2021 using Pearson correlation. The exceptions are art and farmland, which were correlated on a quarterly ground from Q4 2018 to Q4 2021.

(Quarterly correlation was calculated between all assets. The difference between quarterly and monthly correlation was negligible, therefore it is reasonable to compare the two categories of correlation coefficients.)

For assets that have daily releases, such equally the cryptocurrencies and the S&P, information was translated to monthly by pulling the price on the 1st of every month. Similarly, for the monthly and daily releases, the quarterly price was denoted every bit the price on the 1st solar day of each quarter.

Nosotros chose to summate correlation over this three-year period primarily to maximize the number of comparable assets, simply there was also some other reason. Over longer fourth dimension frames the asset correlation is far more various, merely the long time frame isn’t e'er relevant when you're making about-term investment decisions. Nosotros wanted to consider a smaller time frame in order to consider how various alternative portfolios could move in the short term.

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   Artprice Global Alphabetize
   [An alphabetize of the top blue-scrap artworks].
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   Liv-ex 100
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   MoneyMade robo advisor index
   [A proprietary alphabetize of robo advisors].
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   PWCC 500
   [An alphabetize of the top 500 blue-chip trading cards].
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   U.S. Department of the Treasury. (n.d.). Treasury.Gov. Retrieved December 1, 2021, from https://Treasury.gov
6. 
   Yahoo! Finance. (n.d.). Yahoo! Finance. Retrieved December one, 2021, from https://finance.yahoo.com/