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Should you buy individual stocks or the SPY ETF?

Oct 01, 2018

  • Below are two charts illustrating realized 1-month pairwise correlations and 1-month average dispersion for stocks in the S&P 500 over the last 3 years.
  • Realized pairwise Correlation of stocks in the S&P 500 has dropped to the lowest levels we have seen in 2018 which typically benefits "stock picking".
  • Dispersion of stocks in the S&P 500 fell through most of August and September and are currently sitting near 2018 lows, which suggests the payoff from "stocking picking" is limited -- this is in contrast to the low realized pairwise correlations between stocks in the S&P 500
  • The conflict between low realized pairwise correlations and low levels of dispersion for stocks in the S&P 500 suggests investors should be VERY careful when "stock picking" in the current environment but the payoff MAY BE better than simply buying the SPY ETF

Source: Capital IQ