Correlation Between Materials Select and VanEck Steel

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

By analyzing existing cross correlation between Materials Select Sector and VanEck Steel ETF, you can compare the effects of market volatilities on Materials Select and VanEck Steel 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 Materials Select with a short position of VanEck Steel. Check out your portfolio center. Please also check ongoing floating volatility patterns of Materials Select and VanEck Steel.

Diversification Opportunities for Materials Select and VanEck Steel

0.69

Correlation Coefficient

Materials Select  VanEck Steel

Poor diversification

The 3 months correlation between Materials and VanEck is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Materials Select Sector and VanEck Steel ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VanEck Steel ETF and Materials Select 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 Materials Select Sector are associated (or correlated) with VanEck Steel. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of VanEck Steel ETF has no effect on the direction of Materials Select i.e., Materials Select and VanEck Steel go up and down completely randomly.

Pair Corralation between Materials Select and VanEck Steel

Considering the 90-day investment horizon Materials Select Sector is expected to generate 0.75 times more return on investment than VanEck Steel. However, Materials Select Sector is 1.34 times less risky than VanEck Steel. It trades about 0.16 of its potential returns per unit of risk. VanEck Steel ETF is currently generating about 0.08 per unit of risk. If you would invest  7,676  in Materials Select Sector on January 31, 2024 and sell it today you would earn a total of  1,351  from holding Materials Select Sector or generate 17.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.19%
Values	Daily Returns

Materials Select Sector  vs.  VanEck Steel ETF

Materials Select Sector

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Materials Select Sector are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain essential indicators, Materials Select may actually be approaching a critical reversion point that can send shares even higher in May 2024.

VanEck Steel ETF

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in VanEck Steel ETF are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong essential indicators, VanEck Steel is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Materials Select and VanEck Steel

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

The idea behind Materials Select Sector and VanEck Steel ETF 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.