One of the things we cover in our discussion of building a low risk portfolio is the need to find investments that have a low correlation to one another and the overall market. This is probably the most powerful tool for reducing risk in your portfolio without the need to suffer a reduction in overall return. The problem is finding those high return but low correlation funds or ETF’s.

Mutual fund correlation ( or finding mutual funds and ETF’s that are not correlated to one another) is the basis of our articles on the best mutual funds to diversify and mutual fund correlation.

State Street band has posted an online tool for calculating the correlation between their ETFs. State Street Bank, which of course is the institution that sponsors the SPDR series of ETFs. This is a very useful tool, you simply enter the ETF that you want to base the analysis on, select the time period that you want to calculate the correlation over, and it will give you a list of funds with both high and low correlations to your target fund.

The primary limitation to the tool is the fact that many of the ETFs in the database don’t span the maximum 3 year history, and of course that 3 year lookback does not span the last bear market, so if you are looking to find funds that might be a good holding in a severe correction you will have to look somewhere else. But this is the most useful online tool I’ve seen for actually building a diversified ETF portfolio yet. This is especially true if you are interested in a fixed asset allocation as opposed to a sector rotation strategy.