Correlation Between SPDR SP and Vanguard Financials

Can any of the company-specific risk be diversified away by investing in both SPDR SP and Vanguard Financials at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining SPDR SP and Vanguard Financials into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SPDR SP Bank and Vanguard Financials Index, you can compare the effects of market volatilities on SPDR SP and Vanguard Financials and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in SPDR SP with a short position of Vanguard Financials. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Vanguard Financials.

Diversification Opportunities for SPDR SP and Vanguard Financials

0.87

Correlation Coefficient

SPDR SP  Vanguard Financials

Very poor diversification

The 3 months correlation between SPDR and Vanguard is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP Bank and Vanguard Financials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Financials Index and SPDR SP is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on SPDR SP Bank are associated (or correlated) with Vanguard Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Financials Index has no effect on the direction of SPDR SP i.e., SPDR SP and Vanguard Financials go up and down completely randomly.

Pair Corralation between SPDR SP and Vanguard Financials

Considering the 90-day investment horizon SPDR SP is expected to generate 1.71 times less return on investment than Vanguard Financials. In addition to that, SPDR SP is 1.5 times more volatile than Vanguard Financials Index. It trades about 0.02 of its total potential returns per unit of risk. Vanguard Financials Index is currently generating about 0.05 per unit of volatility. If you would invest  7,767  in Vanguard Financials Index on February 4, 2024 and sell it today you would earn a total of  2,103  from holding Vanguard Financials Index or generate 27.08% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

SPDR SP Bank  vs.  Vanguard Financials Index

SPDR SP Bank

Risk-Adjusted Performance

7 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP Bank are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain fundamental drivers, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Vanguard Financials Index

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Financials Index are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong technical and fundamental indicators, Vanguard Financials is not utilizing all of its potentials. The newest stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with SPDR SP and Vanguard Financials

The main advantage of trading using opposite SPDR SP and Vanguard Financials positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SPDR SP position performs unexpectedly, Vanguard Financials can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Vanguard Financials will offset losses from the drop in Vanguard Financials' long position.

The idea behind SPDR SP Bank and Vanguard Financials Index pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.