Diversification with ETFs (update)

This updates the data on a previous analysis of ETF correlation with the FTSE 100 Index.

The following chart shows the 40 ETFs with the highest trading volumes on the LSE and their correlations with the FTSE 100 Index. The ETFs are ranked by the correlation value; the ETFs at the top of the chart have the closest correlation with the FTSE 100 Index.

Correlation of the 40 most traded ETFs with FTSE 100 Index


As might be expected the FTSE 100 tracker ETFs are at the top of the above ranking – led by the Vanguard ETF [VUKE].

Rather surprisingly second in the ranking is iShares MSCI World Acc [SWDA], which invests in a broad range of developed companies, but the UK weighting in the ETF is only 7.5%. This ETF has a higher correlation with the FTSE 100 Index than the iShares FTSE 100 [ISF].

Also near the top of the ranking are iShares MSCI Europe Ex-UK [IEUX] and iShares S&P 500 [IDUS].

Most surprising perhaps is the higher ranking of iShares MSCI Emerging Markets [IDEM and IEEM].

In summary, don’t expect much diversification (away from the FTSE 100) by investing in any of the above.

The gold ETFs (Source Physical Markets Gold P-ETC [SGLD], Lyxor Gold Bullion Securities Ltd [GBS] and ETFS Physical Gold [PHAU]) are ranked near the bottom – their correlations are low, albeit not negative.

For maximum diversification away from the FTSE 100, an investor needs to look at the bottom of the list – namely the gilt and T-Bond ETFs (iShares FTSE UK All Stocks Gilt [IGLT] and iShares USD Treasury Bond 7-10 [IDTM]).

Extract taken from The UK Stock Market Almanac.

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