Funds that don't correlate with stock market

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lexor
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Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 12:12 pm

I know you can buy gold or silver or even bitcoin, but I don't like buying commodities. What are stocks and ETFs that don't correlate strongly with the rest of the stock market?

Some ideas
Companies that deal in precious metals or other precious resources
REITs
Some bonds funds
Utilities Stocks/ETFs

What are the best options for having decent returns normally but still protecting in a downturn?
Last edited by lexor on Sun Jan 12, 2020 12:28 pm, edited 1 time in total.

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Re: Funds that don't correlate with stock market

Post by whodidntante » Sun Jan 12, 2020 12:17 pm

I'm not a fan of the "safe" equities mindset. I think all equities are risky. If you need safety, go buy something that is actually safe. Or you can use trend following which has historically reduced drawdowns.

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Re: Funds that don't correlate with stock market

Post by Nate79 » Sun Jan 12, 2020 12:20 pm

I would suggest you read this interesting thread on diversification first:
viewtopic.php?f=10&t=300204

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lexor
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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 12:28 pm

Nate79 wrote:
Sun Jan 12, 2020 12:20 pm
I would suggest you read this interesting thread on diversification first:
viewtopic.php?f=10&t=300204

Yes perhaps I should say more than "decent" returns. I'm looking for a divercifier which is likely to have very good returns. REITs might be a good example since I believe they have (slightly) lower correlation with the market but also have had great historical returns.

This is also why I don't want to buy Gold for example since while it has low correlation it has much lower returns. Bond funds are sort of in a similar boat, but if I don't get a good answer in this thread I think Bonds are the standards answer.

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Re: Funds that don't correlate with stock market

Post by HawkeyePierce » Sun Jan 12, 2020 12:30 pm

Fortunately we can measure this:

https://www.portfoliovisualizer.com/ass ... rrelations

That shows us four asset classes zero-to-negative correlation to the stock market:

* Short term Treasurys
* Long term Treasurys
* Total bond
* Muni bonds
* TIPS

The obvious takeaway here is that bonds are the most reliable investment that isn't correlated with the stock market. Intuitively, this makes sense: bonds aren't stocks!

This link gives us the correlations of REITs, utilities and precious metals producers to the total market: https://www.portfoliovisualizer.com/ass ... &months=36

Since 2004, Utilities have had the least correlation at 0.48 but even then, that's a positive correlation.

If you want an uncorrelated investment, buy long term Treasurys.

TANSTAAFL. Returns come with risk, no way around it.

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Re: Funds that don't correlate with stock market

Post by nisiprius » Sun Jan 12, 2020 12:34 pm

There are no such things as funds that "don't" correlate with the stock market. All there are, are funds that have not correlated with the stock market.

"Low correlation" isn't any more reliable than "high return."

In particular, the idea that REITs (which are just a stock sector) "have" low correlation with the stock market is deeply flawed. About this deeply, to be precise. (Blue and orange, REITS; green, stock market as a whole).

Image

Between 12/31/2006 and 2/28/2009, Vanguard Total Stock Market lost -45%. But Vanguard Real Estate (REITs) lost -65%. That's about the same as having a -20% correction, then another -20% correction, then another -20% correction, then ANOTHER -20% correction all on top of each other. So bad that if you'd invested on 12/31/2006, your REIT index investment would still be behind your Total Stock investment.

To those who say "but 2008-2009 was unusual," my reply is that of course, all strategies outperform if you throw out the data from the supposedly unusual times when they didn't. In 1937, when the stock market had finally recovered from the crash of 1929, there were probably people who said "Don't worry, that can't happen again," only to see the fourth worst crash in history occur in 1937.

The math says that over any time period, if other conditions are met, a collection of stock sectors with low correlation to each other can have higher risk-adjusted return than any of its components, but persistence is never guaranteed, and with realistic numbers, even when it all works, the result is "incrementally better long-term risk-adjusted return," not "powerful crash protection."
Last edited by nisiprius on Sun Jan 12, 2020 1:40 pm, edited 5 times in total.
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Re: Funds that don't correlate with stock market

Post by retired@50 » Sun Jan 12, 2020 12:36 pm

HawkeyePierce wrote:
Sun Jan 12, 2020 12:30 pm

The obvious takeaway here is that bonds are the most reliable investment that isn't correlated with the stock market. Intuitively, this makes sense: bonds aren't stocks!
^^^ This.

Regards,
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 12:40 pm

lexor wrote:
Sun Jan 12, 2020 12:12 pm
I know you can buy gold or silver or even bitcoin, but I don't like buying commodities. What are stocks and ETFs that don't correlate strongly with the rest of the stock market?

Some ideas
Companies that deal in precious metals or other precious resources
REITs
Some bonds funds
Utilities Stocks/ETFs

What are the best options for having decent returns normally but still protecting in a downturn?
What's your definition of "don't strongly correlate"?

Correlation <0.5?
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Re: Funds that don't correlate with stock market

Post by Kingpin » Sun Jan 12, 2020 12:45 pm

Prudent bear fund

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Re: Funds that don't correlate with stock market

Post by HawkeyePierce » Sun Jan 12, 2020 12:51 pm

Kingpin wrote:
Sun Jan 12, 2020 12:45 pm
Prudent bear fund
You mean this one? https://www.morningstar.com/funds/XNAS/BEARX/quote

:shock:

With an expense ratio of 1.83%, a load of 5.50% and for which $10k invested at inception would now be $2000?

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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 12:56 pm

lexor wrote:
Sun Jan 12, 2020 12:28 pm

Yes perhaps I should say more than "decent" returns. I'm looking for a divercifier which is likely to have very good returns.
Once upon a time, that would have been long Treasuries.

I would expect that to be less true going forward.
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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 12:58 pm

HawkeyePierce wrote:
Sun Jan 12, 2020 12:51 pm
Kingpin wrote:
Sun Jan 12, 2020 12:45 pm
Prudent bear fund
You mean this one? https://www.morningstar.com/funds/XNAS/BEARX/quote

:shock:

With an expense ratio of 1.83%, a load of 5.50% and for which $10k invested at inception would now be $2000?
Funny, but that doesn't fit the criteria of expected good returns.

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Re: Funds that don't correlate with stock market

Post by Kingpin » Sun Jan 12, 2020 1:22 pm

The OP asked what doesn’t correlate with the market. Prudent bear may be the worst thing someone could ever buy, I just tried to answer his question as I interpreted it. Without all the glib replies I might add. :?

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Re: Funds that don't correlate with stock market

Post by dru808 » Sun Jan 12, 2020 1:24 pm

Long bonds

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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 1:26 pm

dru808 wrote:
Sun Jan 12, 2020 1:24 pm
Long bonds
Total bond market index?

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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 1:27 pm

lexor wrote:
Sun Jan 12, 2020 1:26 pm
dru808 wrote:
Sun Jan 12, 2020 1:24 pm
Long bonds
Total bond market index?
No.

Long Treasuries.

Like VGLT/TLT.
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 1:28 pm

Or if you have big volatility appetite:

EDV
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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 1:30 pm

watchnerd wrote:
Sun Jan 12, 2020 1:27 pm
lexor wrote:
Sun Jan 12, 2020 1:26 pm
dru808 wrote:
Sun Jan 12, 2020 1:24 pm
Long bonds
Total bond market index?
No.

Long Treasuries.

Like VGLT/TLT.
Fidelity Long-Term Treasury Bond Index Fund is the same thing but less expensive right?

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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 1:31 pm

What do you all think of REITs for this purpose. They have good historical returns and slightly lower market correlation. I believe they still correlate pretty strongly but at least less than total stock market
Last edited by lexor on Sun Jan 12, 2020 1:32 pm, edited 1 time in total.

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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 1:32 pm

Kingpin wrote:
Sun Jan 12, 2020 1:22 pm
The OP asked what doesn’t correlate with the market. Prudent bear may be the worst thing someone could ever buy, I just tried to answer his question as I interpreted it. Without all the glib replies I might add. :?
Well, the OP also said this in his first post:

"What are the best options for having decent returns normally but still protecting in a downturn?"

But the Prudent Bear is definitely amusing. ;)
Last edited by watchnerd on Sun Jan 12, 2020 1:37 pm, edited 1 time in total.
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 1:34 pm

lexor wrote:
Sun Jan 12, 2020 1:31 pm
What do you all think of REITs for this purpose. They have good historical returns and slightly lower market correlation
Mehhhh.

They tank hard in bad markets, just as bad as the general stock market.

2008, REITs and the US stock market both show -37%.

https://www.portfoliovisualizer.com/bac ... tion2_1=50
Last edited by watchnerd on Sun Jan 12, 2020 1:42 pm, edited 1 time in total.
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Re: Funds that don't correlate with stock market

Post by nisiprius » Sun Jan 12, 2020 1:37 pm

Kingpin wrote:
Sun Jan 12, 2020 12:45 pm
Prudent bear fund
Well, you can get a negative correlation with the stock market by taking a short position in it, which is essentially what the Prudent Bear Fund (BEARX) does, but unfortunately when you do that, you are cancelling out return at the same time as you cancel out volatility.

Getting negative correlation through short positions and derivatives is like a magician: he pulls a rabbit out of a hat, but only after first putting it in.

It's not as if the Prudent Bear fund only reacts when the stock market goes down. It also goes down when the stock market goes up. And the stock market has gone up a lot more than it has gone down. Mixing in BEARX is just a complicated way of erasing some of the stock market--accelerator and brakes at the same time--while paying an 2.89% expense ratio (two! point! eight! nine!) for the privilege. In the past, as you'd expect, rather than adding BEARX, it would have been a lot better simply to hold less stocks.

Portfolio 1
VTSMX Vanguard Total Stock Mkt Idx Inv 100.00%
Portfolio 2
VTSMX Vanguard Total Stock Mkt Idx Inv 80.00%
BEARX Federated Prudent Bear A 20.00%
Portfolio 3
Ticker Name Allocation
VTSMX Vanguard Total Stock Mkt Idx Inv 60.00%
VBMFX Vanguard Total Bond Market Index Inv 40.00%

Source

Image

Starting with portfolio 1, 100% stocks, and replacing 20% of it with Prudent Bear would indeed have reduced volatility as measured by standard deviation, and, perhaps most interesting, maximum drawdown, from -51% to -35%. It even improved risk-adjusted return as measured by Sharpe and Sortino ratios. But it cut return by a lot.

While a plain boring old 60/40 portfolio (portfolio 3) didn't provide very powerful protection, it did just as well as adding BEARX, and it had much higher return.

In short, it sure had the desired low correlation, in fact strong negative correlation: -0.85 However, it did not meet Lexor's other desiderata, particularly not "decent return normally."

Source

Image
Last edited by nisiprius on Sun Jan 12, 2020 1:44 pm, edited 2 times in total.
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Re: Funds that don't correlate with stock market

Post by nisiprius » Sun Jan 12, 2020 1:41 pm

lexor wrote:
Sun Jan 12, 2020 1:31 pm
What do you all think of REITs for this purpose. They have good historical returns and slightly lower market correlation. I believe they still correlate pretty strongly but at least less than total stock market
I know all my stuff is TL;DR but please take a look at my posting upthread. In 2008-2009, the Vanguard Real Estate Index Fund fell by the equivalent of four -20% corrections all at once.
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 1:46 pm

nisiprius wrote:
Sun Jan 12, 2020 1:41 pm
I know all my stuff is TL;DR
You're never going to get the Generation Z audience unless you start practicing to keep it under 280 characters. ;)
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 1:55 pm

lexor wrote:
Sun Jan 12, 2020 1:30 pm
watchnerd wrote:
Sun Jan 12, 2020 1:27 pm
lexor wrote:
Sun Jan 12, 2020 1:26 pm
dru808 wrote:
Sun Jan 12, 2020 1:24 pm
Long bonds
Total bond market index?
No.

Long Treasuries.

Like VGLT/TLT.
Fidelity Long-Term Treasury Bond Index Fund is the same thing but less expensive right?
The duration looks the same.

Fidelity ER is lower by 2 bps.

So they're pretty much fungible.

EDV, on the other hand, has much longer duration (24 years) if you really want to get radical on your lack of correlation, and because it's so volatile, you need less of it. But if you're not good at matching risk parity and doing some MVO analysis, it might be too radical.
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 1:58 pm

lexor wrote:
Sun Jan 12, 2020 1:30 pm
watchnerd wrote:
Sun Jan 12, 2020 1:27 pm
lexor wrote:
Sun Jan 12, 2020 1:26 pm
dru808 wrote:
Sun Jan 12, 2020 1:24 pm
Long bonds
Total bond market index?
No.

Long Treasuries.

Like VGLT/TLT.
Fidelity Long-Term Treasury Bond Index Fund is the same thing but less expensive right?
Here is a comparison of FNBX, VGLT, and TLT:

https://www.portfoliovisualizer.com/fun ... TLT%2CVGLT

In the context of a whole portfolio, the differences will be miniscule. So just pick whichever you like.

BIG CAVEAT:

Expecting long Treasuries to do the same going forward in our current interest rate environments is a BIG question mark and probably fairly unlikely.

5-10 year forecasts range from -0.2% (Black Rock) to 1.9% (JP Morgan).
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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 2:05 pm

watchnerd wrote:
Sun Jan 12, 2020 1:58 pm
lexor wrote:
Sun Jan 12, 2020 1:30 pm
watchnerd wrote:
Sun Jan 12, 2020 1:27 pm
lexor wrote:
Sun Jan 12, 2020 1:26 pm
dru808 wrote:
Sun Jan 12, 2020 1:24 pm
Long bonds
Total bond market index?
No.

Long Treasuries.

Like VGLT/TLT.
Fidelity Long-Term Treasury Bond Index Fund is the same thing but less expensive right?
Here is a comparison of FNBX, VGLT, and TLT:

https://www.portfoliovisualizer.com/fun ... TLT%2CVGLT

In the context of a whole portfolio, the differences will be miniscule. So just pick whichever you like.

BIG CAVEAT:

Expecting long Treasuries to do the same going forward in our current interest rate environments is a BIG question mark and probably fairly unlikely.

5-10 year forecasts range from -0.2% (Black Rock) to 1.9% (JP Morgan).
Maybe with a low balance and over a short time period but for example 500k (with no additions) over 30 years would cost 95k more in TLT and 16k more in VGLT. I could buy a nice car for 16k and a really nice car for 95k even taking into account inflation.

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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 2:11 pm

lexor wrote:
Sun Jan 12, 2020 2:05 pm


Maybe with a low balance and over a short time period but for example 500k (with no additions) over 30 years would cost 95k more in TLT and 16k more in VGLT. I could buy a nice car for 16k and a really nice car for 95k even taking into account inflation.
I was referring to the other attributes, like duration and yield.

If you plan to hold forever, either the Fidelity or Vanguard funds. There is a 2 bps difference between them. 2 bps difference can be covered if one does slightly better or worse than the other in return / index tracking / taxation efficiency.

TLT is 15 bps higher, but the volume and AUM is much higher if you think that matters in crisis moments.
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 2:19 pm

As an example of the small spread, even though the Fidelity LTT fund has a 2 bps lower ER than the Vanguard LTT, here are the 2019 results:

VGLT: 14.31%
FNBGX: 14.22%

Exact same index, the BBgBarc US Treasury Long TR USD.

I don't know what the Vanguard fund is doing better, but it's doing something, or at least it was in 2019.

VGLT also lost less in 2018 than FNBX by 10 bps.
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Re: Funds that don't correlate with stock market

Post by oldzey » Sun Jan 12, 2020 2:33 pm

Here's an example of such a fund - QREARX (TIAA Real Estate Account) compared with the Three-fund portfolio:

M* Chart


Image
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Re: Funds that don't correlate with stock market

Post by lazyday » Sun Jan 12, 2020 3:13 pm

lexor wrote:
Sun Jan 12, 2020 1:31 pm
What do you all think of REITs for this purpose.
Take a look at the article in the top post here: viewtopic.php?t=248350

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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 3:37 pm

watchnerd wrote:
Sun Jan 12, 2020 2:19 pm
As an example of the small spread, even though the Fidelity LTT fund has a 2 bps lower ER than the Vanguard LTT, here are the 2019 results:

VGLT: 14.31%
FNBGX: 14.22%

Exact same index, the BBgBarc US Treasury Long TR USD.

I don't know what the Vanguard fund is doing better, but it's doing something, or at least it was in 2019.

VGLT also lost less in 2018 than FNBX by 10 bps.
Comparing apples to apples VLGSX to FNBGX (both mutual funds), FNBGX outperformed over 10 years (6.88% vs 6.87%).

Also Fidelity lists the same returns for VGLT as VLGSX (6.87%) so FNBGX also outperformed VGLT over 10 years https://snapshot.fidelity.com/fidresear ... T&appCode=

For some reason it seems like many tools don't have proper historical data for these funds. For example https://www.marketwatch.com/tools/mutua ... re=Returns acts as if the funds are new but they are not.
Last edited by lexor on Sun Jan 12, 2020 3:40 pm, edited 1 time in total.

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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 3:39 pm

lazyday wrote:
Sun Jan 12, 2020 3:13 pm
lexor wrote:
Sun Jan 12, 2020 1:31 pm
What do you all think of REITs for this purpose.
Take a look at the article in the top post here: viewtopic.php?t=248350
Interesting, thank you

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Re: Funds that don't correlate with stock market

Post by aristotelian » Sun Jan 12, 2020 4:46 pm

I am surprised someone hasn't come up with an ETF of least correlated stocks. Maybe some Boglehead could come up with one in M1.

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Re: Funds that don't correlate with stock market

Post by SlowMovingInvestor » Sun Jan 12, 2020 5:06 pm

aristotelian wrote:
Sun Jan 12, 2020 4:46 pm
I am surprised someone hasn't come up with an ETF of least correlated stocks. Maybe some Boglehead could come up with one in M1.
You're not just looking for least correlated stocks, presumably ? You're looking for a basket of least correlated stocks.

That requires a lot of data, crunching power, and some mathematical optimization tricks to come up with a reasonable solution. Certainly possible for a firm, but probably not that easy for even a mathematically adept person working alone ?

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Re: Funds that don't correlate with stock market

Post by SlowMovingInvestor » Sun Jan 12, 2020 5:09 pm

I remember things like catastrophe bonds, or mortality bonds that are supposed to be uncorrelated with the stock market. Not really for the retail investor to hold. Although if you held something like BRK, I suppose you're implicitly investing in reinsurance ?

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Re: Funds that don't correlate with stock market

Post by Forester » Sun Jan 12, 2020 5:14 pm

lexor wrote:
Sun Jan 12, 2020 12:12 pm
I know you can buy gold or silver or even bitcoin, but I don't like buying commodities. What are stocks and ETFs that don't correlate strongly with the rest of the stock market?

Some ideas
Companies that deal in precious metals or other precious resources
REITs
Some bonds funds
Utilities Stocks/ETFs

What are the best options for having decent returns normally but still protecting in a downturn?
Easiest option is Min Vol. Same returns as market cap index, but bounces around less.

https://www.msci.com/documents/10199/f5 ... 761d009094

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Re: Funds that don't correlate with stock market

Post by willthrill81 » Sun Jan 12, 2020 5:16 pm

lexor wrote:
Sun Jan 12, 2020 12:28 pm
Nate79 wrote:
Sun Jan 12, 2020 12:20 pm
I would suggest you read this interesting thread on diversification first:
viewtopic.php?f=10&t=300204

Yes perhaps I should say more than "decent" returns. I'm looking for a divercifier which is likely to have very good returns. REITs might be a good example since I believe they have (slightly) lower correlation with the market but also have had great historical returns.

This is also why I don't want to buy Gold for example since while it has low correlation it has much lower returns. Bond funds are sort of in a similar boat, but if I don't get a good answer in this thread I think Bonds are the standards answer.
I'm afraid that your quest to find the holy grail of investing, that is, an investment with stock-like returns but less volatility than stocks, is not likely to end well.
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Re: Funds that don't correlate with stock market

Post by willthrill81 » Sun Jan 12, 2020 5:17 pm

Forester wrote:
Sun Jan 12, 2020 5:14 pm
lexor wrote:
Sun Jan 12, 2020 12:12 pm
I know you can buy gold or silver or even bitcoin, but I don't like buying commodities. What are stocks and ETFs that don't correlate strongly with the rest of the stock market?

Some ideas
Companies that deal in precious metals or other precious resources
REITs
Some bonds funds
Utilities Stocks/ETFs

What are the best options for having decent returns normally but still protecting in a downturn?
Easiest option is Min Vol. Same returns as market cap index, but bounces around less.

https://www.msci.com/documents/10199/f5 ... 761d009094
Another plausible approach for the OP might be to use a target volatility approach.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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lexor
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Re: Funds that don't correlate with stock market

Post by lexor » Sun Jan 12, 2020 5:20 pm

willthrill81 wrote:
Sun Jan 12, 2020 5:16 pm
lexor wrote:
Sun Jan 12, 2020 12:28 pm
Nate79 wrote:
Sun Jan 12, 2020 12:20 pm
I would suggest you read this interesting thread on diversification first:
viewtopic.php?f=10&t=300204

Yes perhaps I should say more than "decent" returns. I'm looking for a divercifier which is likely to have very good returns. REITs might be a good example since I believe they have (slightly) lower correlation with the market but also have had great historical returns.

This is also why I don't want to buy Gold for example since while it has low correlation it has much lower returns. Bond funds are sort of in a similar boat, but if I don't get a good answer in this thread I think Bonds are the standards answer.
I'm afraid that your quest to find the holy grail of investing, that is, an investment with stock-like returns but less volatility than stocks, is not likely to end well.
Not less volatility just less correlation

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 5:39 pm

aristotelian wrote:
Sun Jan 12, 2020 4:46 pm
I am surprised someone hasn't come up with an ETF of least correlated stocks. Maybe some Boglehead could come up with one in M1.
Ultimately, factor models predict and have shown, you can't defray equity market risk with other equities very much.

And if you do find a bucket of equities that move against the rest of the market, you've probably found a bunch of losers that are declining a lot because they're bad businesses.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Funds that don't correlate with stock market

Post by willthrill81 » Sun Jan 12, 2020 5:42 pm

lexor wrote:
Sun Jan 12, 2020 5:20 pm
willthrill81 wrote:
Sun Jan 12, 2020 5:16 pm
lexor wrote:
Sun Jan 12, 2020 12:28 pm
Nate79 wrote:
Sun Jan 12, 2020 12:20 pm
I would suggest you read this interesting thread on diversification first:
viewtopic.php?f=10&t=300204

Yes perhaps I should say more than "decent" returns. I'm looking for a divercifier which is likely to have very good returns. REITs might be a good example since I believe they have (slightly) lower correlation with the market but also have had great historical returns.

This is also why I don't want to buy Gold for example since while it has low correlation it has much lower returns. Bond funds are sort of in a similar boat, but if I don't get a good answer in this thread I think Bonds are the standards answer.
I'm afraid that your quest to find the holy grail of investing, that is, an investment with stock-like returns but less volatility than stocks, is not likely to end well.
Not less volatility just less correlation
It's quite probably an almost equally difficult task. That's what the 'modern portfolio theory' fans salivate for, stock-like returns but uncorrelated to stocks. Larry Swedroe has really pushed a lot of alternative funds that he believes fit the bill, but there is a lot of reticence from many here about them, not the least of which being their usually high expenses.

As I noted above, you might want to investigate using stocks and bonds in a target volatility approach. It might help to get you at least partly where you want to go.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 5:42 pm

willthrill81 wrote:
Sun Jan 12, 2020 5:16 pm


I'm afraid that your quest to find the holy grail of investing, that is, an investment with stock-like returns but less volatility than stocks, is not likely to end well.
I was thinking the same thing.

The best that might be hoped for is a "hybrid" that gives you half the return and half the volatility, like Emerging Market Bonds.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Funds that don't correlate with stock market

Post by willthrill81 » Sun Jan 12, 2020 5:43 pm

watchnerd wrote:
Sun Jan 12, 2020 5:39 pm
aristotelian wrote:
Sun Jan 12, 2020 4:46 pm
I am surprised someone hasn't come up with an ETF of least correlated stocks. Maybe some Boglehead could come up with one in M1.
Ultimately, factor models predict and have shown, you can't defray equity market risk with other equities very much.
I'm not so sure about that. SCV funds over the last 20 years certainly defrayed at least some of that risk. They certainly did very well from 2000-2002 when TSM was tanking. But in 2008-2009, they didn't help at all. YMMV.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

aristotelian
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Re: Funds that don't correlate with stock market

Post by aristotelian » Sun Jan 12, 2020 5:49 pm

watchnerd wrote:
Sun Jan 12, 2020 5:39 pm
aristotelian wrote:
Sun Jan 12, 2020 4:46 pm
I am surprised someone hasn't come up with an ETF of least correlated stocks. Maybe some Boglehead could come up with one in M1.
Ultimately, factor models predict and have shown, you can't defray equity market risk with other equities very much.

And if you do find a bucket of equities that move against the rest of the market, you've probably found a bunch of losers that are declining a lot because they're bad businesses.
Yeah, given that all stocks are stocks and subject to the same macroeconomic phenomena, it is hard to imagine any set of stocks that would systematically go up when the market is going down and vice versa. At best you are looking for lower correlation rather than negative correlation. At that point the best defense against the ups and downs of market is simply having a long timeframe.

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watchnerd
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Re: Funds that don't correlate with stock market

Post by watchnerd » Sun Jan 12, 2020 6:04 pm

willthrill81 wrote:
Sun Jan 12, 2020 5:43 pm


I'm not so sure about that. SCV funds over the last 20 years certainly defrayed at least some of that risk. They certainly did very well from 2000-2002 when TSM was tanking. But in 2008-2009, they didn't help at all. YMMV.
Some is not very much, as 2008-2009 shows.

REITs show the same....you can call them "alternatives" or "diversifiers", but as 2008 shows, they're still very much equities with equity risk.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Funds that don't correlate with stock market

Post by willthrill81 » Sun Jan 12, 2020 6:09 pm

watchnerd wrote:
Sun Jan 12, 2020 6:04 pm
willthrill81 wrote:
Sun Jan 12, 2020 5:43 pm


I'm not so sure about that. SCV funds over the last 20 years certainly defrayed at least some of that risk. They certainly did very well from 2000-2002 when TSM was tanking. But in 2008-2009, they didn't help at all. YMMV.
Some is not very much, as 2008-2009 shows.

REITs show the same....you can call them "alternatives" or "diversifiers", but as 2008 shows, they're still very much equities with equity risk.
Agreed.

One of the best diversifiers to a portfolio comprised of stock and fixed income may be rental real estate, but this is often (usually?) a part-time job and carries its own risks.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Funds that don't correlate with stock market

Post by willthrill81 » Sun Jan 12, 2020 6:11 pm

lexor wrote:
Sun Jan 12, 2020 12:28 pm
This is also why I don't want to buy Gold for example since while it has low correlation it has much lower returns. Bond funds are sort of in a similar boat, but if I don't get a good answer in this thread I think Bonds are the standards answer.
Rental real estate is the only investment I'm aware of that has historically been a strong competitor for stocks in terms of returns, but as I noted above, it's not usually passive.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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JoMoney
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Re: Funds that don't correlate with stock market

Post by JoMoney » Sun Jan 12, 2020 6:22 pm

lexor wrote:
Sun Jan 12, 2020 12:12 pm
...
What are the best options for having decent returns normally but still protecting in a downturn?
I buy a low-cost broad market index fund, and keep enough in cash/short-term government bonds that I'm not worried at all what the stock market is doing. I don't try to "buy low - sell high". I just keep making regular contributions (and at some point that will change to regular withdrawals) and expect that will get me something close to the average returns available over my investing horizon.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Funds that don't correlate with stock market

Post by SlowMovingInvestor » Sun Jan 12, 2020 6:25 pm

willthrill81 wrote:
Sun Jan 12, 2020 6:11 pm
Rental real estate is the only investment I'm aware of that has historically been a strong competitor for stocks in terms of returns, but as I noted above, it's not usually passive.
This leads to the question -- would it then make sense to use residential REITS (including those that specialize in single family housing) as a diversifier ?

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