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Updated 2mo ago.
Updated 2mo ago.
Correlation measures how closely two investments move in the same direction, on a scale from -1 to +1. A correlation of +1 means they always move together, -1 means they always move in opposite directions, and 0 means there is no relationship.
Canadian equity ETFs like XIU.TO and XIC.TO have a very high correlation (close to +1) because they track similar indices. In contrast, a bond ETF like ZAG.TO has a lower correlation with equities, making it a good complement in a diversified portfolio.
Correlation is at the heart of diversification. If all your ETFs are highly correlated, your portfolio rises and falls as a single block. By combining assets with low correlation (stocks + bonds, Canada + international), you reduce overall risk without necessarily sacrificing returns.