Research in International Business and Finance 51 (2020) 101109

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Research in International Business and Finance

journal homepage: www.elsevier.com/locate/ribaf

Commodity financialization and sector ETFs: Evidence from crude

T
oil futures
Pan Liua, Dmitry Vedenovb, Gabriel J. Powerc,⁎
a
Analytics Fellow at McKinsey & Company in Beijing, China
b
Department of Agricultural Economics, Texas A&M University, College Station, TX, United States
c
Department of Finance, Insurance, and Real Estate, Faculty of Business Administration, Université Laval, Canada

A R T IC LE I N F O ABS TRA CT

Keywords: We investigate the diversification benefits of energy assets in the setting of commodity fi-
Futures nancialization using data on crude oil futures and Sector ETFs (SPDRs). Correlations between
Commodities commodities and financial assets increased during the post-Commodity Futures Modernization
ETF Act (CFMA)/commodity bull cycle period, resulting in lower benefits of diversification. However,
SPDR
we find that conditional correlations between crude oil futures and sector ETFs meaningfully
Sector
Industry
increased only since the 2008–09 financial crisis. The results therefore suggest that the financial
Correlation crisis, rather than CFMA regulation, explains changes in the diversification benefits of com-
DCC modities. Moreover, we find that oil futures returns are less correlated with SPDRs than with the
Time-varying S&P index. Thus, energy futures, and crude oil in particular, offer the potential for diversification
Conditional benefits in sector-style investing.
Financialization
Diversification

1. Introduction

Prior to 2000, commodities attracted relatively little interest from institutional and other large investors (e.g. Tang and Xiong,
2012). However, after 2000, several events led to a substantial increase in non-traditional investor positions in commodity futures
and other commodity-related instruments such as commodity-linked notes (e.g. Cheng and Xiong, 2014). First, the 2000–2002 dot-
com bubble and stock market crash made investors look for new ways to diversify their portfolios. Second, the Commodity Futures
Modernization Act (CFMA) signed on December 21, 2000, made it easier for investors to gain exposure to ‘commodity beta’ through
futures instead of shares of commodity-related firms (e.g. Boons et al., 2014). Third, new empirical evidence of low correlations
between commodities and equities suggested greater diversification benefits (e.g. Erb and Harvey, 2006; Gorton and Rouwenhorst,
2006). Fourth, the commodity bull cycle of 2000–2008 convinced many investors that a long-term ‘commodity supercycle’ would
generate positive excess returns.
With financialization (generally defined as the post-CFMA period), the diversification benefits of commodities decreased due to
increasing price comovements between asset classes. For example, Silvennoinen and Thorp (2013) report increasing correlations

The authors thank the Editor, John Goodell, and an anonymous reviewer for helpful comments and suggestions. The authors acknowledge partial
support from Hatch project TEX0-1-9258.
Authorship is shared equally.
⁎
Corresponding author.
E-mail address: gabriel.power@fsa.ulaval.ca (G.J. Power).

https://doi.org/10.1016/j.ribaf.2019.101109
Received 26 March 2019; Received in revised form 11 September 2019; Accepted 24 September 2019
Available online 13 October 2019
0275-5319/ © 2019 Elsevier B.V. All rights reserved.
P. Liu, et al. Research in International Business and Finance 51 (2020) 101109

between different asset classes, peaking with the financial crisis of 2008. Indeed, commodities have provided a poor hedge for equity
portfolios, especially during the financial crisis (Olson et al., 2017). Without challenging these stylized facts, we are interested in (1)
whether they are true for all industrial sectors or only for some (thus suggesting diversification benefits for sector-style investing),
and (2) whether the catalyst for greater comovement was financialization or the financial crisis. To our knowledge, these questions
and our answers are novel to the literature.
We find, first, that conditional correlations between crude oil and at the level of industry indexes were low during the fi-
nancialization period and increased sharply only with the financial crisis. This result suggests that the financial crisis, rather than
post-CFMA financialization, explains the loss of diversification benefits from including commodities in portfolios. This finding
suggests that changes in the investment value of energy positions are due to the financial crisis and its aftermath (potentially the Fed’s
Quantitative Easing policy and the low interest rate environment), rather than CFMA- and financialization-related regulation.
Moreover, we find that correlations have generally remained close to their crisis levels.
Thus, our results build on Adams and Glück (2015) who argue that “commodities have become an investment style for institu-
tional investors”. As a result, higher correlations between commodities and equities are expected to continue even though the
financial crisis is over. Nonetheless, we show that correlations between crude oil and industry sectors are low compared to crude oil’s
correlations with the S&P500 index, which is consistent with the fact that asset pricing theory uses the market portfolio as an index.
Second, we find that with the exception of Energy and Materials, industry sector/crude oil correlations are consistently lower than S&
P index/crude oil. We also show that the jump in correlation occurs roughly at the same time for all industry sectors, namely when
the financial crisis begins.
Together, these results suggest that (1) crude oil still has diversification benefits when combined with sector-style investing, and
(2) the sharp increase in correlations is better explained by the financial crisis and its aftermath than by CFMA-period financiali-
zation. We also report evidence that during our sample period, conditional correlations between different pairs of industry SPDRs had
generally similar time trends. Correlations increased slowly over time, but decreased sharply during the dot-com bubble and the
financial crisis of 2008. The Financials sector also had a sharp drop in correlation with other sectors in late 2016.

2. Empirical approach

To study links between commodities and specific industrial sectors, we obtain data on Standard and Poor’s Depository Receipts
(SPDRs) (see e.g. State Street, 2017). Sector SPDRs are Exchange Traded Funds (ETFs) that are traded on the NYSE Arca, owned by
the ICE (formerly ArcaEx). These SPDRs track the performance of stocks in each respective industrial sector (e.g. Gleason et al., 2004;
Krause and Tse, 2013). Prior research has found that studying different sector indexes reveals heterogeneous effects that are hidden
when only the S&P market index is analyzed. For example, Sakaki (2019) finds that stock returns for all sector indexes except energy
and utilities are negatively affected by real oil price shocks.
To describe changes in correlations, we measure daily conditional correlations using the dynamic conditional correlation (DCC)
model of Engle (2002). This framework is well known, widely accepted, easy to replicate, and used by practitioners as well as
academics. To proxy for commodity positions in investor portfolios, we choose crude oil futures for several reasons. First, it is the
most actively traded commodity derivative, so liquidity or stale price quotes are not an issue, especially for nearby maturities.
Second, it is the leading commodity in indexes such as the GSCI or DJ-UBS (with typically 50% or greater weight). Third, as it is a
single commodity, we avoid the potentially confounding effect of using a basket of numerous, very different commodities. Lastly,
crude oil was identified by Singleton (2013) as being affected by financialization and is therefore a natural candidate for the study.
This study contributes to a large literature on comovements and volatility spillovers between commodities and equities.
Regarding crude oil and other commodities, de Nicola et al. (2016) find that price returns of different categories of commodities have
become increasingly correlated, and that stock market volatility is linked to this increase in correlations. Silvennoinen and Thorp
(2016) find that returns on crude oil and biofuel-related commodities (e.g., corn) are correlated, and that these correlations increase
when price levels are higher, but that other agricultural commodities are only weakly correlated with crude oil. Regarding links
between crude oil and equity markets, Degiannakis et al. (2014) find that only aggregate demand-related oil shocks affect stock
market volatility, while supply-side and oil demand shocks do not. Jordan et al. (2016) find that using commodity futures data helps
improve forecasts of equity returns in a commodity-dependent country (Canada). Lastly, Malik and Ewing (2009) find evidence of
volatility transmission between prices of oil and equities in the US, supporting the idea of cross-hedging. Their study, however,
predates the financialization debate and the financial crisis, which we investigate here.
Based on the literature and economic theory, we state some predictions concerning correlations between commodities and in-
dustrial sector ETFs.1

• Crude oil should be more highly correlated with the S&P market index than with individual sector ETFs. Indeed, the market index
diversifies away sector-specific idiosyncratic risk, which would have the effect of lowering correlations with a pro-cyclical
commodity such as crude oil.
• Among ETFs, Energy should be the most highly correlated with crude oil futures. This is obvious because the Energy ETF tracks
firms for which oil extraction is a core business activity, such as Exxon Mobil Corp, Chevron Corp, Schlumberger Ltd.,
ConocoPhillips, and Occidental Pete Corp.

1
We thank a reviewer in particular for suggesting this discussion.

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P. Liu, et al. Research in International Business and Finance 51 (2020) 101109

• Consumer Discretionary and Consumer Staples should be the least correlated with crude oil. When energy prices are high,
households have less disposable income. They spend less on items such as hotels and restaurants, clothing, and luxury goods. They
can also postpone purchases of durable goods (which are included in the Discretionary index). The Staples index represents
mainly food and beverage firms. While such goods are somewhat price-inelastic, higher energy prices increase firm costs of
production, transportation and storage. Overall, correlations for these two ETFs should be very low and possibly negative.
• Materials should display higher correlations than all other ETFs except Energy. This sector, which includes firms in construction,
mining, chemicals, metals, and pulp & paper, is energy-intensive. Moreover, over the sample period, high energy prices were
linked to higher demand rather than lower supply.
• Financials and Technology should display low but positive correlations with crude oil. These sectors are not closely linked to
commodities, but are highly pro-cyclical. Since in our sample high energy prices are linked to bull markets (not shortages), these
indexes would typically be gaining in value as energy prices increase, because a booming economy would have a greater demand
for their services and products.

3. Data

Our sample data consists of daily price observations for the S&P 500 index futures, CME Group (formerly NYMEX) WTI light sweet
crude oil futures (nearby), and six sector SPDRs over the period January 4, 1999 to December 30, 2016. We obtain a pseudo-
continuous series of WTI crude oil futures prices and CME S&P 500 index futures prices from Thomson Datastream. The futures
contract time series data are spliced using a standard method, namely from front-month futures prices and switching from first to
second nearby when second nearby volume surpasses front month volume. We collect daily data from Yahoo Finance (2017) for the
Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Materials (XLB), and Technology (XLK)
sector SPDRs. We exclude Health Care (XLV), Industrials (XLI), Real Estate (XLRE), and Utilities (XLU) because the length of the
sample for these SPDRs is much shorter. To see how a particular SPDR represents an industry, consider Energy. On November 1,
2010, XLE held 39 firms, with the top-5 representing 50.15% of total value. On June 24, 2019, the number of firms held was 29, with
the top-5 representing 53.34% of value.2
Table 1 reports descriptive statistics for all series of daily returns. Crude oil futures and Financials are the most volatile. Most
variables display negative skewness. The Financial and Technology SPDRs display positive skewness, however. All series have excess
kurtosis. Lastly, the series are stationary and display conditional heteroskedasticity. The latter results motivate our use of a multi-
variate model of conditional volatilities and correlations below.

4. DCC-GARCH modeling framework

We use the dynamic conditional correlation GARCH (DCC-GARCH) model introduced by Engle (2002) to model the evolution
over time of conditional correlations. We report conditional correlations between returns of crude oil futures and sector-specific
indexes. We use prices of the CME WTI crude oil futures nearby contract and prices for sector ETFs traded on the NYSE Arca. As a
benchmark to assess economic significance, we also compute and report similar correlations between the S&P index and sector
indexes.
Daily log returns (henceforth, returns) are calculated by taking the difference between the logarithms of two consecutive prices
rti = ln(pti ) − ln(pti− 1), where rti is the return of variable i at period t , pti is the price of futures or SPDR i at time t . Let rt be the vector of
returns for crude oil futures (CL), S&P500 index futures, and six stock sectors, such that
rt = (rtCL, rtSP , rtXLY , rtXLP , rtXLE , rtXLF , rtXLB, rtXLK )

The DCC-GARCH model can be written as:

rt = μt + εt (1)

εt = Ht1/2 z t (2)

Ht = Dt Rt Dt (3)
where rt is an 8 × 1 vector of returns at time t , μt is an 8 × 1 vector of the expected values of rt , εt is an 8 × 1 vector of residuals with
E(εt ) = 0 and Var(εt ) = Ht , Ht is an 8 × 8 matrix of conditional variances of εt at time t , and Ht1/2 can be obtained by a Cholesky
factorization. Dt is a 8 × 8 diagonal matrix of conditional standard deviations at time t , i.e. Dt = diag { hi, t } , Rt is an 8 × 8 symmetric
matrix of conditional correlations at time t , and z t is an 8 × 1 vector of i.i.d. error terms with E(z t ) = 0 and Var(z t ) = I . The diagonal
elements hi, t in Dt evolve according to a univariate GARCH process of the form
hi, t = ωi + αεi2, t − 1 + βhi, t − 1 (4)
The elements of Ht are described by Ht = hi, t hj, t ρi, j . Since Rt is a positive definite matrix, it can be decomposed into

2
In November 2010, the top-5 firms in XLE were: Exxon Mobil Corp with 18.65%, Chevron Corp New 13.56%, Schlumberger Ltd 8.11%,
ConocoPhillips 5.24%, and Occidental Petroleum Corp 4.59%. As of June 24, 2019 the top-5 were: Exxon Mobil Corp with 22.52%, Chevron Corp
20.33%, ConocoPhillips 5.86%, EOG Resources Inc 4.63%, and Schlumberger Ltd 4.22%.

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Table 1
Descriptive statistics for daily return series. This table reports descriptive statistics for the daily price log return time series for each of the indexes
studied in this paper. The data cover the period January 4, 1999, to December 30, 2016. The indexes are respectively: crude oil futures (CL), S&P
500 index futures (SP), and the following SPDRs: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Materials
(XLB), and Technology (XLK). The numbers in parentheses denote lag orders used for Engle’s (1982) ARCH-LM test. The lag orders are selected using
the Schwarz (Bayesian) information criterion. For all indexes, using this ARCH-LM test we reject the null of no autoregressive conditional het-
eroskedasticity (ARCH) effects at the 1% level of significance.
Crude oil S&P 500 Cons. discr. Cons. stapl. Energy Finan-cials Mater-ials Tech.

Min (%) −16.54 −10.36 −12.36 −6.2132 −15.6 −20.15 −13.25 −9.051
Max (%) 16.41 13.56 9.326 6.659 15.25 27.30 13.15 14.93
Mean (%) .0312 .0113 .0232 .0144 .0242 −.0019 .0146 .0057
Std.dev.(%) 2.434 1.246 1.437 .971 1.762 2.032 1.568 1.659
Skewness −.124 −.0327 −.227 −.122 −.398 .0845 −.111 .254
Kurtosis 6.79 12.65 8.39 7.23 11.58 24.91 8.277 8.889
ARCH-LM 156.8 (1) 841.04 (2) 367.68 (2) 208.92 (1) 836.71 (2) 469.46 (1) 143.48 (1) 383.17 (2)

Note: Unit root and KPSS test results confirm that the time series of returns are stationary. Details are omitted for brevity but available upon request.

Rt = Qt*−1 Qt Qt*−1, where Qt is a positive definite matrix containing the conditional variances of εt and Qt*−1 is the inverted diagonal
matrix with the square roots of the diagonal elements of Qt , such that

⎡1/ qCL _ CL ⋯ 0 ⎤
Qt*−1 = ⎢ ⋮ ⋱ ⋮ ⎥
⎢ ⎥
0 ⋯ 1/ qXLK _ XLK (5)
⎣ ⎦
The DCC (1,1) -GARCH model is then given by

Qt = (1 − a − b) Q¯ + aεt − 1 εt'− 1 + bQt − 1 (6)

where Q̄ is the unconditional covariance matrix of the standardized errors εt , such that Q¯ = E (εt εt') . The dynamic conditional cor-
relations are then given by
qij, t
ρij, t =
qii, t qjj, t (7)

Following Engle (2002), the model is estimated using a two-step maximum likelihood method. The likelihood function is given by
T T
1 1
L= − ∑ (n ln(2π ) + ln|Ht| + rt' Ht−1 rt ) = − 2 ∑ (n ln(2π ) + 2 ln|Dt | + ln|Rt | + εt Rt−1 εt')
2 t=1 t=1 (8)

The GARCH parameters are estimated in the first step and the conditional correlations are estimated in the second step.

5. Results for crude oil and sector ETFs

Our main results concern commodity financialization and industry sectors, so we present the results for crude oil and ETFs first.
We begin by describing the time series of conditional correlations obtained using the methods described above.3 Twenty-eight pairs
of conditional correlations are shown in Figs. 1–4. The results for crude oil and sector ETFs are presented in Fig. 1. For all series of
conditional correlations, the corresponding summary statistics are presented in Table 2. For purposes of comparison, we also present
unconditional correlation coefficients, Pearson’s correlation coefficients, and Kendall’s Taus, which describe potentially nonlinear
dependence.
Fig. 1 reports time series of conditional correlations between crude oil and each of the industry SPDRs (and the S&P). Our main
finding is that CFMA-period financialization is not linked to increasing correlations between industry sectors and commodities (as
proxied by crude oil futures). With the exception of Energy, conditional correlations between crude oil and industry SPDRs or the S&P
increase sharply during the financial crisis in 2008–2009 and continue to climb post-crisis. Correlations decrease a little in 2014, but
increase again in 2016. Overall, correlations remain nearly at the same level as during the crisis. These results are consistent across
industry SPDRs. The exception is Energy, which is the ETF most correlated with crude oil. Correlation for crude oil/Energy is fairly
high in 1999, decreases in the early 2000s, and begins to rise in 2004.4

3
We omit estimation details, for parsimony, but they are available upon request.
4
The intermittently low correlations between Energy and crude oil futures in the early 2000s are surprising. Moving-window correlations confirm
the result, however, and over the period 1999-2004 the static correlation between daily crude oil futures returns and Energy ETF returns is only
0.31. Changes over time in the composition of the ETF do not seem to explain this. While we do not have a definitive explanation for the result, two
considerations are: (1) our data are daily, and at a high frequency correlations are lower, and (2) according to Caginalp et al. (2014) ETF values can
deviate substantially from their Net Asset Value. If over time ETFs became more efficient, it is possible that in the early 2000s they did not track

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Fig. 1. Pairwise Dynamic Conditional Correlations: Crude Oil/S&P through S&P/Consumer Discretionary. This figure reports the daily time series
plots, over the period January 1999 to December 2016, of the dynamic conditional correlations between each pair of indexes, beginning with Crude
Oil and S&P 500, through S&P with Consumer discretionary (XLY). The indexes are respectively: crude oil futures (CL), S&P 500 index futures (SP),
and the following SPDRs: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Materials (XLB), and Technology
(XLK).

Table 2 reports summary statistics for all pairwise conditional correlations between crude oil and each industry SPDR (or S&P).
Excluding Energy, we find that equity/commodity correlations are lower for industry sectors than for the market index. The means of
conditional correlations range from 0.06 to 0.23 (excluding Energy), and the medians are always lower. The maximum values
reached for daily conditional correlations are always lower for industry SPDRs than for the S&P. The sector with the lowest corre-
lation is Consumer Staples with a mean conditional correlation of 0.06 (median of −0.01), while Materials has the highest correlation
with a mean of 0.23 (median of 0.17). Overall, these findings suggest that potential diversification benefits linked to sector-style
investing are greater than what the literature has found by looking at aggregate market indexes across asset classes.
The evolution of sector ETF correlations with crude oil is somewhat puzzling and warrants further discussion. For all sectors, the
figures show that correlations are lower in the pre-crisis period, they increase substantially with the financial crisis and Great
Recession, and they do not return to their pre-crisis levels afterward (except for a brief dip in late 2014-early 2015).5
First, why were correlations low prior to the financial crisis despite financialization? We argue that financialization occurred
gradually and that commodities continued to provide diversification benefits after the CFMA (Gorton and Rouwenhorst, 2006).
According to Tang and Xiong (2012), cross-commodity correlations remained low until about 2007, and accumulated index flows (a
measure of financialization) only accelerated in late 2007. Moreover, among non-traditional commodity traders, hedge funds have

(footnote continued)
fundamentals as well, and correlations would be lower.
5
The pattern over time for Energy is the same, but the base level of correlations is higher.

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Fig. 2. Pairwise Dynamic Conditional Correlations: S&P/Consumer Staples Through Consumer Discretionary/Financials. This figure reports the
daily time series plots, over the period January 1999 to December 2016, of the dynamic conditional correlations between each pair of indexes,
beginning with S&P 500 (SP) and Consumer staples (XLP) through Consumer discretionary (XLY) and Financials (XLF). The indexes are respectively:
crude oil futures (CL), S&P 500 index futures (SP), and the following SPDRs: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE),
Financials (XLF), Materials (XLB), and Technology (XLK).

had a greater impact than index funds, who entered these markets earlier (see Büyükşahin and Robe, 2014). Therefore, this period
may be characterized as “soft financialization”.
Second, the high correlations observed during the financial crisis are well documented (e.g., Silvennoinen and Thorp, 2013).
Interestingly, however, correlations remained low in China during this period, suggesting it was not a worldwide phenomenon (Tang
and Xiong, 2012).
Third and last, post-Great Recession correlations decreased but did not return to their pre-crisis levels. We argue that following
the Great Recession, unconventional monetary policy (the Fed’s quantitative easing) and structural changes in the markets led
investors to aggressively pursue alternative investments in search of yield (see e.g. Chari et al., 2017; Kurov and Stan, 2018). With
money supply growing as a result of the Fed’s actions and interest rates remaining low for a decade after the financial crisis, investors
have considered more exotic investments, including commodities but also infrastructure and large-scale project debt, for instance.
The new inflows of investment into commodities have contributed to maintaining correlations at higher levels than prior to the
financial crisis.

6. Results for S&P500 and sector ETFs

We report results for the evolution of conditional correlations between the U.S. S&P 500 market index and the sector ETFs in our
sample. The purpose of presenting these results is a robustness check, as industry correlations with the equity index should follow a
different pattern over time. To provide a benchmark to interpret whether changes in conditional correlations are economically

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Fig. 3. Pairwise Dynamic Conditional Correlations: Consumer Discretionary/Materials through Energy/Materials. This figure reports the daily time
series plots, over the period January 1999 to December 2016, of the dynamic conditional correlations between each pair of indexes, beginning with
Consumer discretionary (XLY) and Materials (XLB) through Energy (XLE) and Materials (XLB). The indexes are respectively: crude oil futures (CL), S
&P 500 index futures (SP), and the following SPDRs: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF),
Materials (XLB), and Technology (XLK).

significant, we report in Table 2 and Fig. 2 evidence on conditional correlations between sectors and the S&P. These results show that
SPDR conditional correlations with the S&P fell substantially with the dot-com bubble and crash, recovered, and have remained high
since 2003. Note that on average, SPDR/S&P correlations range from 0.6-0.85, compared with 0.06-0.23 for SPDR/crude oil.
Lastly, the bottom of Table 2 and Figs. 3–4 report conditional correlations for different pairs of SPDRs. The time series show a
similar pattern across most pairs of SPDRs. The overall trend is that correlations increase slowly over time, but are punctuated by two
sharp drops: the dot-com bubble of 2001–2002 and the financial crisis of 2008–2009. Interestingly, correlations fall significantly
during each of these two episodes. Finally, in late 2016 the Financials sector displays a sharp drop in correlation with all other
sectors. Indeed, during this period the financial sector strongly outperformed the rest of the stock market. In November 2016 alone,
the Financials ETF gained about 15% in value. Contributing factors probably include a recovery from the 2015–2016 “stock sell-off”
period, volatile market activity in the bond market in November 2016, and the US Presidential election (through a resolution of
regulatory uncertainty effect).

7. Conclusion

It is a stylized fact that the financialization of commodities has affected their portfolio diversification properties. We ask: Are
rising correlations between crude oil and equities also true at the level of individual industry sectors (through ETFs)? Have corre-
lations increased significantly following the CFMA in 2000, or only with the financial crisis of 2008? These questions are relevant for
financial markets, as they concern the diversification benefits of commodities (among which crude oil plays a leading role), the

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Fig. 4. Pairwise Dynamic Conditional Correlations: Energy/Technology through Materials/Technology. This figure reports the daily time series
plots, over the period January 1999 to December 2016, of the dynamic conditional correlations between each pair of indexes, beginning with Energy
(XLE) and Technology (XLK) through Materials (XLB) with Technology (XLK). The indexes are respectively: crude oil futures (CL), S&P 500 index
futures (SP), and the following SPDRs: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Materials (XLB), and
Technology (XLK).

Table 2
Summary statistics for pairwise dynamic conditional correlations. This table reports descriptive statistics of bivariate dynamic conditional corre-
lations between S&P index futures, crude oil futures, and each of the industry ETFs studied in this paper. The measures of Pearson’s correlation (for
linear dependence) and Kendall’s tau (for possibly non-linear dependence) are also calculated from the time series of dynamic conditional corre-
lations for each pair.
Min Max Mean Median Pearson's ρ Kendall's τ

Crude oil/S&P500 −.148 .596 .177 .12 .201 .116

Crude oil/Consumer discretionary −.313 .518 .0914 .0324 .103 .0595
Crude oil/Consumer staples −.277 .477 .062 −.0097 .0529 .0379
Crude oil/Energy .171 .735 .498 .534 .492 .352
Crude oil/Financials −.255 .49 .11 .0863 .125 .0691
Crude oil/Materials −.128 .586 .229 .174 .241 .159
Crude oil/Technology −.18 .537 .14 .0871 .126 .0803
S&P500/Consumer discretionary .537 .938 .837 .86 .844 .645
S&P500/Consumer staples .109 .861 .695 .748 .678 .501
S&P500/Energy .0787 .896 .617 .634 .688 .444
S&P500/Financials .535 .913 .839 .867 .806 .66
S&P500/Materials .203 .912 .736 .781 .764 .554
S&P500/Technology .706 .907 .842 .839 .842 .667
Consumer discretionary/Cons. staples .155 .851 .659 .709 .616 .449
Consumer discretionary/Energy .0436 .854 .509 .516 .537 .332
Consumer discretionary/Financials .487 .869 .775 .808 .737 .561
Consumer discretionary/Materials .371 .893 .703 .731 .702 .485
Consumer discretionary/Technology .262 .919 .742 .772 .69 .519
Consumer staples/Energy .138 .81 .457 .453 .465 .289
Consumer staples/Financials .226 .813 .63 .665 .559 .422
Consumer staples/Materials .217 .822 .567 .589 .541 .371
Consumer staples/Technology −.222 .832 .557 .64 .442 .361
Energy/Financials .0638 .834 .514 .537 .538 .34
Energy/Materials .203 .927 .659 .721 .694 .466
Energy/Technology −.122 .864 .49 .499 .461 .309
Financials/Materials .335 .868 .681 .715 .644 .473
Financials/Technology .267 .856 .69 .724 .598 .474
Materials/Technology −.0147 .892 .635 .677 .567 .421

financialization phenomenon associated with institutional investors taking greater positions in energy and other commodity markets,
as well as sector-style investing and links between futures contracts and ETFs. Using data on industry-specific SPDRs as well as crude
oil and S&P index futures over the period 1999–2016, we estimate DCC models to capture conditional correlations and find the
following.
Across industry sectors, conditional correlations between crude oil and industry SPDRs did not increase much prior to the 2008-09
financial crisis, suggesting that it was the crisis rather than CFMA-period financialization that led to lower diversification benefits for

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crude oil and other commodity positions.

Conditional correlations between crude oil and industry sectors have remained at levels close to their crisis levels, suggesting a
long-lasting impact of the crisis on asset class comovements. This finding can be linked to post-recession monetary policy and to
structural changes occurring in financial markets. In a period characterized by Quantitative Easing, an increasing money supply, and
low interest rates, investors have increasingly considered alternative assets such as commodities or infrastructure investments.
Correlations for all industry sectors (except Energy) have remained relatively low, suggesting diversification benefits of energy
and commodities for sector-style investing. Lastly, we document evidence that conditional correlations between different pairs of
industry SPDRs behaved fairly similarly during this sample period. Correlations slowly increased, but were marked by sharp drops
during the dot-com bubble and 2008 financial crisis. Correlations for the Financial sector SPDR drop at the end of 2016, linked to this
sector briefly outperforming the rest of the market. Thus, while post-financial crisis correlations between crude oil and the S&P
market index suggest lower diversification benefits than during the early 2000s, there appear to be potential gains to using com-
modities in sector-style investing.

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