To sell correlation, investors can: In practice, exchange-traded funds (ETF's) are sometimes chosen instead of indices.
Dispersion trading is increasingly recognized as a strategy for traders looking to beat the market.
At its heart, dispersion trading takes advantage of the fact that an index's volatility is usually less variable than that of its individual stocks, a result of diversification.
However, market forces often raise the expected correlation among stocks, giving the impression of increased index volatility.
This overestimation, often pushed by structured product sellers who prefer long correlation positions, makes index volatility seem higher than it is.