Finding Synergy With SPY

August 30, 2021

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Craig Israelsen, Ph.D., creator of the 7Twelve portfolio, consultant to 7Twelve Advisors, LLC and executive-in-residence in the Financial Planning Program at Utah Valley University. 

As of July 31, 2021, there were 2,668 ETFs. Of those, 1,418 had a five-year performance history (from Aug. 1, 2016 to July 31, 2021). The largest single ETF is the SPDR S&P 500 ETF Trust (SPY), with over $393.7 billion in assets, which represents 5.75% of the total ETF assets of $6.7 trillion.

SPY mirrors the S&P 500 Index and is classified as a large cap blend U.S. equity fund. For many investors, a large cap U.S. blend fund is often a core component in the equity portion of their portfolio.

Among the 1,418 ETFs in that category were 173 “trading” ETFs (leverage, inverse, etc.) that I removed from this analysis, resulting in 1,245 ETFs. One of those was SPY, leaving 1,244 ETFs.

This article examines which of those 1,244 ETFs produced a “synergistic” five-year return when combined with SPY in a 50/50 mix (with monthly rebalancing). In other words, this article examines which ETFs were good teammates for SPY over the past five years if the goal was to generate a combined return that was better than any ETF by itself.

Understandably, there are other objectives when combining funds, such as reducing drawdown or limiting volatility, and those are often accomplished by combining equity funds and fixed income funds.

The classic 60% stock/40% bond asset allocation represents a well-known example. However, this analysis focuses on synergistic performance enhancement within the equity portion of a portfolio—thus we are not considering fixed income funds here.

Narrow Field

As shown below, ETFs that created a synergistic return when combined with SPY is a very short list. Only 12 ETFs produced an enhanced five-year return when paired with SPY in a 50/50 mix. By “synergistic,” I mean a 50/50 mix that produced a return higher than any ETF by itself.

For example, when the Global X Copper Miners ETF (COPX) was combined with SPY, the five-year return was 19.20%, which is higher than the 17.22% return of SPY by itself and the 18.89% return of COPX by itself. A synergistic result oftentimes is the result of an advantageously low correlation between the two ETFs (or mutual funds, stocks, etc.).

In many cases, the synergistic return of the 50/50 tandem was modest. For example, the 50/50 combo of SPY and the Emerging Markets Internet & Ecommerce ETF (EMQQ) produced a five-year return of 18.35%, which was only 5 basis points higher than the 18.30% return of EMQQ by itself.

On the other side of the spectrum, the return of a 50/50 pairing of SPY and the Virtus LifeSci Biotech Clinical Trials ETF (BBC) was 95 bps higher than BBC’s return and 128 bps higher than SPY’s return.The point is that any improvement is noteworthy. For investors who haggle over a few basis points of expense ratio, the same degree of attentiveness should apply to anything we can do to get a few more bps of performance by thoughtful ETF combinations.

Correlations Matter

In the case of COPX, the five-year correlation of monthly returns was 0.657. For a comparison, the 60-month correlation between SPY and the Vanguard Total Stock Market ETF (VTI) was 0.996. Thus, 0.657 is a respectably low correlation.

This list of 12 ETFs had an average 60-month correlation with SPY of 0.72. The odd ducks are the Invesco S&P 500 Equal Weight Industrials ETF (RGI), with a correlation of 0.929, and the Vanguard Extended Market ETF (VXF), at 0.923.

What makes this list of ETFs unique is that most of them had relatively low correlation to SPY, but still had five-year returns that were comparable to SPY. That’s the real trick, and very few ETFs achieved it over the past five years.

Think of it this way: To be a low correlation companion to a primary portfolio ingredient (like SPY), you need to generally move in a different direction than SPY. That is how low correlation is created.

If SPY is going up, you need to generally be going down. Or, at least going down some of the time when SPY is going up … and generally going up when SPY is going down.

It’s really about the timing of returns and having them mesh in a productive way. We don’t want a portfolio’s equity ingredients to be duplicates of each other. We need teammates that are different in helpful ways.


What these 12 ETFs demonstrate is a sweet spot of moderate correlation combined with individual performance comparable to SPY. When those conditions were met, the potential to produce a synergistic return with SPY was created.

That is exactly what these 12 ETFs achieved over the past five years. It’s surprisingly rare, as evidenced by only 12 out of 1,244 ETFs doing it. Of course, there is no guarantee these 12 ETFs will be synergistic performance drivers over the next five years.

What we do observe from this list of 12 ETFs is that a correlation coefficient in the range of 0.50 to 0.75 is a good starting point in our search for potential synergistic teammates to the large cap U.S. equity component in the equity portion of a portfolio.


Synergy With SPY (60-month period: 8/1/2016 – 7/31/2021)

Listed below are the 12 ETFs (out of 1,244 ETFs) that produced a higher 5-year return when combined with SPY (50/50 split) than either ETF produced by itself

  Ticker Category Assets ($M) 5-Year % Average Annualized Return 60-Month Correlation to SPY 5-Year % Average Annualized Return
SPDR S&P 500 ETF Trust SPY Large Blend 382,511 17.22 --- 50/50 Mix with SPY
Global X Copper Miners ETF COPX Natural Resources 1,097 18.89 0.657 19.20
Virtus Life Sciences Biotech Clinical Trials ETF BBC Health 38 17.55 0.584 18.50
VanEck Vectors Steel ETF SLX Natural Resources 191 18.33 0.702 18.46
EMQQ Emerging Markets Internet & Ecommerce ETF EMQQ Diversified Emerging Mkts 1,372 18.3 0.549 18.35
SPDR S&P Retail ETF XRT Consumer Cyclical 1,134 17.82 0.681 18.20
Invesco China Technology ETF CQQQ China Region 1,549 16.52 0.472 17.56
Invesco S&P SmallCap Value with Momentum ETF XSVM Small Value 345 16.84 0.726 17.55
iShares US Healthcare Providers ETF IHF Health 1,183 17.26 0.737 17.45
SPDR S&P Homebuilders ETF XHB Consumer Cyclical 1,847 16.94 0.839 17.45
Vanguard Extended Market ETF VXF Mid-Cap Growth 17,570 17.31 0.923 17.37
First Trust SSI Strat Convert Secs ETF FCVT Convertibles 334 17.13 0.849 17.27
Invesco S&P 500 Equal Weight Industrials ETF RGI Industrials 518 17.04 0.929 17.23


Contact Craig Israelsen at [email protected]

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