ETF Correlations: Why You Shouldn’t Bank On Them

Many areas of the market are traditionally correlated: as the dollar weakens, oil gains in price; as investors become fearful, Treasury yields sink. But you can’t always bank on these correlations when it comes to investing in exchange traded funds (ETFs).

In recent months, both oil and stocks have traded more or less in line with one another as investors snapped up things that were expected to increase in value, reports Mark Gongloff for The Wall Street Journal.

Enter last week: oil dropped harder than stocks did. The S&P 500 (^GSPC) declined 2.2%, and oil dropped off 8.9%. Gongloff suggests that one reason could be that in terms of valuation, oil got a little too far ahead of itself. Another reason could be that this correlation isn’t going to last indefinitely.

It’s a good lesson for investors: don’t bank on correlations. Occasionally, things don’t pan out the way they have historically. While correlations can guide the decisions you make when investing, watching trend lines for the true signals could be a better way to go.

• United States Oil Fund (USO): up 2.7% year-to-date
• SPDRs (SPY): up 17.2% year-to-date

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