Equities have been moving in lockstep, contributing to wide market swings. Consequently, investors should consider alternative exchange traded funds that exhibit low correlations to diversify away from rising volatility in traditional assets.
“After years of low correlations in a post-QE world, we are now entering a regime where higher correlations are feeding higher volatility. In my view, higher volatility (compared to 2017) is here to stay. Increasing stock correlations within equities are additionally making it harder for investors to look for diversification by simply investing in equities. Thus, beating markets through simple stock selection is getting harder,” WisdomTree Strategist, Gaurav Sinha, said in a research note.
Since mid-January, we’ve witnessed a sharp acceleration in stock correlations, which poses a severe challenge for investors from a de-risk standpoint. Sinha argued that the higher correlations across equities led to higher VIX levels in the following months and could potentially act as a signal for spikes in the VIX as well as wider or more wild swings.