To illustrate, below is the 3-year monthly correlation between the Goldman Sachs commodity index (ETF GSG) and the S&P 500, from 1970. Note right side of graph.
Below I’ve compared the GS index (red) to the CRB, Dow Jones-UBS (ETF DJP), and Deutsche Bank (ETF DBC) indices in blue. Note the similar results.
Asset classes which have in the past exhibited low correlation, including: commodities, international stock indices (developed and emerging markets), and real estate, all continue to see high levels of correlation to U.S. equities.
This hurts strategies that use diversification as a way to reduce portfolio volatility, whether it’s traditional MPT or something more active like Tactical Asset Allocation.
None of this is new information and I’m not the first to highlight it – just something that we as investors need to keep on the radar. Reducing portfolio volatility through diversification continues to become more and more difficult.