S&P Sector Correlations

Earlier this year, the CME added a whole range of S&P E-mini sector index futures to their universe of available instruments. These contracts were created to provide a mechanism to directly hedge sector exposure according to the S&P Select Sector group of indices.

PortfolioScience has followed suit and introduced symbols for all CME S&P sector index futures contracts. With regards to current market conditions, the correlations of each of these sectors to the broader S&P 500 index are directly relevant. Currently, YTD correlation for each of the cash indices stands at:

Save for Energy and Utilities, most of these sectors are showing fairly high correlations to the market. This is likely a result of equities as an asset class suffering from systemic volatility due to the effects of the financial crisis rearing its head recently. Another useful analysis is the sector cross-correlations, which are presented below in the form of a correlation matrix. All calculations are using YTD data:

Using Excel's "conditional formatting" feature, the correlation matrix we initially generated using the RiskAPI Add-In was modified to highlight higher correlations in red and lower correlations in yellow. Note that Utilities (IXU) currently has the lowest cross-correlation of the group.