Q: I’m looking for a way to assess the correlation of certain holdings to determine whether it makes sense to consolidate positions.
How would you think about this? Are there any free tools to pull correlations? What kind of correlation figure should one look for when assessing whether two holdings are too correlated to provide diversification value?
Just as one example, I’m looking at VVL and VUN. But please keep your answer focused on the general questions above.
Thanks very much.
How would you think about this? Are there any free tools to pull correlations? What kind of correlation figure should one look for when assessing whether two holdings are too correlated to provide diversification value?
Just as one example, I’m looking at VVL and VUN. But please keep your answer focused on the general questions above.
Thanks very much.
5i Research Answer:
Beta, or comparing a securities' return to the market, is typically viewed as the best guage of correlation. A fund with a Beta of 1.5 will move 50% more than a fund with a Beta of 1.0. Funds with closely-matching Betas should, in theory, be very highly correlated. Beta is available on most investment websites. Keep in mind Beta is compared to the market, so comparing a Canadian and US focused fund will have different calculations. So one needs to overlay the correlation of different markets as well in such cases.