No Image

Steven Orlowski

Steven Orlowski is a financial writer and financial advisor, financial planner, portfolio manager, trader, and founder of Orlowski Financial Counsel, a Registered Investment Advisor. He holds or has held the following licenses and certifications: FINRA Series 7, 63, 65, 9, 10, the Certified Financial Planner™ designation, and Life and Health Insurance licenses.

As a veteran financial planner and advisor, when recommending mutual funds to clients, there is one critical thing above all: showing potential cheaper alternatives that can achieve the same objectives. However, that is easier said than done since there are 40,000+ stocks, ETFs & mutual funds that one has to analyze to find the one alternative option.

With the power of large scale computing, it is now possible to find the needle in the haystack. Raltin uses advanced analytics and big data to run 2.5 billion correlations on closing day prices to find the one or three of fifteen highly correlated ETF alternatives to the mutual fund you have in mind. To illustrate this example, Below is a chart of three Large Cap Blend mutual funds and the three highest correlated ETFs relative to each fund, as determined at Raltin.com.

Mutual FundAlternative ETF 1 (Correlation Score)Alternative ETF 2 (Correlation Score)Alternative ETF3 (Correlation Score)
STSEX - BlackRock Exchange PortfolioMGV - Vanguard Mega Cap Value ETF (0.96)VTV - Vanguard Value ETF (0.96)SCHV - Schwab US Large-Cap Value ETF (0.96)
JDNAX - Janus Henderson Growth and Income FundSPY - SPDR S&P 500 ETF (0.91)IWB - iShares Russell 1000 (.91) (0.91)VOO - Vanguard 500 ETF (.91)
FLCEX - Fidelity Large Cap Core Enhanced Index FundDGRO - iShares Core Dividend Growth (0.94)CFO - VictoryShares US 500 Enhanced Volatility Wtd ETF (0.93)SPY - SPDR S&P 500 ETF (0.90)

Next to each ETF is a number which represent the correlation between the mutual fund and the corresponding ETF.  This means that, in the case of JDNAX and SPY, the ETF SPY is 91% correlated to the mutual fund JDNAX. This is a very high correlation.  The performance difference between the two will be nearly indistinguishable because the portfolios are very similar.

So, you wouldn’t want to own both.  But which one would you?

When designing a portfolio, there is not much one can control.  Diversification is one thing. The other is cost. If you are choosing between two highly correlated investments, the lower cost one is usually the better choice.

High correlation means similar performance.  Lower fees can improve performance by leaving more of your money invested and growing.

In the case of JDNAX and SPY, the expense ratio for JDNAX is 0.94% versus 0.07% for SPY.  If an investor owned $100,000.00 of JDNAX, the expense ratio would cost him $940.00 per year.  The same investment in SPY would cost only $70.00 per year.

That translates to $870.00 staying in you or your client’s portfolio, each year, which over time will make a big difference.

For financial advisors and investors, understanding correlation, the risks involved, and the costs inherent in similar mutual funds and ETFs is critical. Providing alternatives with lower fees while enhancing portfolio performance and reducing risk by investing in truly diversified and non-correlated investments is mandatory for high-performing portfolios and for thriving and growing financial advisor practices.


Learn more about the Raltin’s correlation methodology and how Raltin serves financial advisors.

Want more information?  To know more, you can contact Raltin by email at raltin@raltin.com or by completing this form.