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Looking to build a quick-and-easy index fund? Of all the stocks in the Dow, United Technologies (UTX) has had the strongest daily correlation with the S&P 500 going back to the beginning of 2005. Each day’s UTX gain or loss has a 69.7% correlation with the S&P 500.

If add in Dupont (DD), the correlation jumps to 80.5%. (Note this is average daily change, so it assumes you invest equal amounts each day.)

If you add is Disney (DIS), the correlation rises to 85.4%.

Now the extra correlation really is hard to come by. If you add ExxonMobil (XOM), the correlation rises to 88.9%.

Still more?

If we add American Express (AXP) the daily correlations rises to 90.6%.

Verizon (VZ) brings it up to 92.6%.

If you want to go for seven stocks, IBM (IBM) will bring you up to 94%.

Now we’re almost out of room. Wal-Mart (WMT) will bring our eight stock index fund up to a 95% daily correlation with the S&P 500. This is, of course, an equally weighted fund.

If you want the extra 5% so you can be perfectly correlated with the index, just add 492 stocks and value weight them.

Posted by edelfenbein at March 10, 2010 4:26 PM