Correlation Between SPDR SP and Select Sector

Can any of the company-specific risk be diversified away by investing in both SPDR SP and Select Sector 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 Select Sector into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SPDR SP 500 and The Select Sector, you can compare the effects of market volatilities on SPDR SP and Select Sector 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 Select Sector. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Select Sector.

Diversification Opportunities for SPDR SP and Select Sector

0.76

Correlation Coefficient

SPDR SP  Select Sector

Poor diversification

The 3 months correlation between SPDR and Select is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 and The Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Sector 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 500 are associated (or correlated) with Select Sector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Sector has no effect on the direction of SPDR SP i.e., SPDR SP and Select Sector go up and down completely randomly.

Pair Corralation between SPDR SP and Select Sector

Assuming the 90 days trading horizon SPDR SP is expected to generate 1.3 times less return on investment than Select Sector. But when comparing it to its historical volatility, SPDR SP 500 is 1.08 times less risky than Select Sector. It trades about 0.15 of its potential returns per unit of risk. The Select Sector is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  58,700  in The Select Sector on February 6, 2024 and sell it today you would earn a total of  10,323  from holding The Select Sector or generate 17.59% return on investment over 90 days.

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

SPDR SP 500  vs.  The Select Sector

SPDR SP 500

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 500 are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, SPDR SP is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Select Sector

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong technical and fundamental indicators, Select Sector is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with SPDR SP and Select Sector

The main advantage of trading using opposite SPDR SP and Select Sector positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SPDR SP position performs unexpectedly, Select Sector 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 Select Sector will offset losses from the drop in Select Sector's long position.

The idea behind SPDR SP 500 and The Select Sector 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.