“A long-only equity investor’s mandate is to find returns investing in single stocks. In a market with correlations as high as they are, it becomes more challenging to pick the winners,” Liz Myers, co-head of equity capital markets for the Americas at J.P. Morgan Chase & Co., said.
Wall Street bankers are looking to the ETF-to-stock trading ratio as a measure of investor sentiment, according to the report. With elevated market volatility, correlation in stock movements are at record levels, and the lockstep movements of the broader market makes it harder to pick individual winners and losers. [ETF Correlations Still Elevated in Headline-Driven Market]
“When correlation goes up, the differences within a sector or even between industries drop, and all things are evaluated as being the same” in terms of risk levels, Russell Investments Chief Market Strategist Steve Wood said. Trying to pick a single performing stock “is like holding a candle to the sun; you can’t see it.”
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.