I own stock in State Street Corp. (NYSE:STT), sponsor of many popular ETFs including the select sector SPDRs, and I was pleased to discover that STT is making available a free correlation tracker at their SPDR website. The site says it is powered by SmartMoney.com and the tracker is very similar to the one offered by Smart Money which you have to pay to use. There is no way of assessing the validity of the data, but after playing with this tracker for a few days I have no complaints.
You can enter the ticker symbol for any security, and the screener will present lists of individual stocks which have the highest and lowest correlation. Naturally they also show how each of the select sector SPDRs correlates to that security. You can also directly compare any two stocks to determine their correlation. I find these correlation trackers very helpful and I have to admit that after using this one, I am more favorably disposed to using the select sector SPDRs.
One way I used the tracker was to see how I could use select sector SPDRs to diversify my portfolio. I entered the ticker symbols of each security which occupies a 5% or greater weight in my porftolio and noted the select sector SPDRs which have the lowest three year correlation. Like a broken record, the tracker kept saying: XLK (Technology), XLV (Health Care), and XLY (Consumer Discretionary).
I never buy stocks that don’t pay dividends, and that has kept me underweight in technology. One purchase of XLK would do the job, adding coverage of internet equipment, computers and peripherals, electronic equipment, office electronics and instruments, and semiconductor equipment and products; but it would also increase my existing exposure to telecom and wireless telecom services. One possible solution would be to use QQQQ to add technology exposure instead of XLK. QQQQ has a .91 correlation to XLK, but it does not include the NYSE-traded telecoms.
Health care exposure really does need to be increased in my portfolio. I own a few blue-chip pharmaceuticals but in terms of adding health care exposure, it would be safer and smarter to buy XLV, the health care ETF, and avoid any further single-stock risk in an area where I have no technical expertise. One investment would provide comprehensive coverage of health care equipment and supplies, health care providers and services, and biotechnology as well as pharmaceuticals.
As far as the consumer discretionary sector goes, industries such as automobiles, apparel, hotels, restaurants, leisure, media, and retailing, I think I might be able to do better by picking individual stocks on my own, but I will keep an open mind to using XLY. If the whole consumer discretionary sector tanks next year due to a recession, XLY shares may become cheap.
A series of equal weight sector funds sponsored by Rydex just started trading last week. They will directly compete with the capitalization-weighted select sector SPDRs, and might be an attractive alternative, if they end up having enough trading volume to be liquid. But we won’t know that for a long time. I am going to use the select sector SPDRs. They are very liquid and inexpensive (average expense ratio is 0.24%) and I might as well patronize the family business, so to speak.
STT 1-yr. chart: