However, taking on lower correlations not only means playing defense, but also paying up for the privilege of doing so. For example, XLP and XLU are more richly valued, by wide margins, than the Financial Select Sector SPDR (NYSEArca: XLF). [Bank ETFs Just Aren’t Getting Any Respect]
Three months ago, five sectors – energy, utilities, staples, telecom and materials – had correlations below 80%. The average return for the five corresponding sector ETFs over that time is 5.1%.
The sector ETFs with higher correlations have performed better over the past 90 days, led by a 10% gain for the Industrial Select Sector SPDR (NYSEArca: XLI). The “laggard” of the group has been XLF with a gain of 6.4% since Sept. 10.
Historical 30-Day Correlations Against S&P 500
Chart Courtesy: ConvergEx Group