As Equity Correlations Surge Upwards, Diversify With Real Assets

U.S. equity correlations are at an extreme compared to historical norms, according to S&P Dow Jones Indices. 

As the U.S. equity benchmark completed its worst first half since 1970 with an 8% monthly decline, correlations between the daily performances of S&P 500 constituents continued to surge upwards, reaching a two-year high of 0.54 over June, S&P Dow Jones Indices reported. 

Real assets are a vital component of a well-diversified portfolio, making the FlexShares Real Assets Allocation Index Fund (ASET) particularly attractive in the current environment. ASET is designed to provide comprehensive real asset exposure to real estate, infrastructure, and natural resources, according to VettaFi. 

ASET employs a “fund of funds” model to provide broad, balanced exposure to real assets, while seeking to minimize volatility. ASET’s portfolio consists of three other FlexShares funds: the FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR), the FlexShares Global Quality Real Estate Index Fund (GQRE), and the FlexShares STOCCGlobal Broad Infrastructure Index Fund (NFRA). 

The wrong mix of real assets may lead to inadvertently increasing a portfolio’s overall volatility, and research from FlexShares finds that a professionally managed, optimally balanced real assets fund may offer an easier way to capture the benefits of real assets investments, according to FlexShares.

NTI uses a methodology based on modern portfolio theory to optimize the three underlying funds. This methodology involves analysis of the volatility of the underlying securities held by the three ETFs to determine the optimal proportion of each fund in the final portfolio, with an eye toward minimizing volatility and reducing risk, according to FlexShares. NTI rebalances the weightings of each ETF in the index annually. It also applies constraints to help ensure that exposure to each fund is no lower than 10% and no higher than 50%.

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