Market Proxies

A recent question has piqued our interest in looking at potential companies that could act as a proxy to a whole market. These would be large-cap and stable companies that tend to follow the general trend of a market over the long term. We decided to take a look at some options over a ten year period. In order to mitigate the concentration risks that come with owning a single company, we decided to focus our energy on conglomerates that are involved in many aspects of a country’s economy.

Berkshire Hathaway (BRK.B):


Berkshire is the often referenced market proxy for the S&P 500. The correlation tends to be closer to 0.8 and seems to diverge relatively consistently. We think we can find something better.

 E.I. du Pont de Nemours and Co. (DD):

We don’t know if it can get much closer to an S&P 500 proxy than this. With a correlation of 0.92 that is quite consistent since 2008, Du Pont makes a great candidate.

Honeywell International (HON):


Don’t be fooled by the recent correlation of 0.69. Honeywell has had a correlation with the S&P that is essentially 1 since 2008 (the cursor is hovering over a 0.99 correlation in the picture).

It is interesting that Berkshire Hathaway has gained the reputation as the de facto S&P 500 when there are numerous other choices that very well may be an even better proxy. In addition, both Du Pont and Honeywell pay a dividend, where BRK.B does not. The usual caveats apply to the above where past results do not mean that they will continue in the future. The distinction between correlation (which is being used above) and the coefficient of determination should also be understood (r vs r^2).  Finally, it is worth noting that we are by no means implying one could or should own a single company in place of a diversified index. One hiccup in operations could be enough to de-rail the correlation for some time and it is very difficult to predict when or if these unexpected events will occur. The above charts are interesting nonetheless and should help to show that there is more than just Berkshire Hathaway when it comes to diversified large-cap securities that shadow U.S. equity markets. 

(Charts courtesy of Thomson Reuters Eikon Service)
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