With a multitude of products to trade, which ones should we choose to gain price diversification?
In this piece, Tom and Tony look at several popular products including Equity Indices, Sector ETFs, Individual Stocks, and Commodity Futures to discern which assets provide the greatest level of price diversification.
To gauge price diversification, we look at the correlation in an assets price to the SPY. A correlation of 0 represents no correlation while values of 1 and -1 represent strong positive and strong negative correlations respectively.
When comparing across various asset classes, commodity futures seem to demonstrate the highest level of price diversification. However, since these products require a high amount of Buying Power to trade, small accounts can trade their associated ETFs which provide very similar levels of diversification to the outright futures.