Have Correlations Made Your Holdings One Color? (VTI, SPY, QQQ, DIA)

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March 19, 2012 2:43pm NASDAQ:QQQ NASDAQ:QQQQ

Whether the proliferation of index funds and exchange-traded funds has helped drive increasing correlations and volatility in the market, has been the subject of some debate in the investment community during the past several


years.

Morningstar brought in James Xiong, a senior research consultant for Morningstar Investment Management, and Mike Rawson ETF analyst for Morningstar to debate the topic.   Xiong states that he has made a connection between increased index trading and increased average stock correlation.

Rawson agrees to a point stating that, “I definitely agree with James’ paper. It definitely proves correlations have gone up, trading activity has gone up, and the co-movement of these stocks has increased and converged. However, I don’t think the only factor, the only cause of this, is the increase in passive investing and the rise of ETFs and popularity of ETFs. In fact, in my mind, the biggest factor contributing to these rising correlations is fear.”

See the full Morningstar interview below:


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