Correlation Between IShares MSCI and SPDR SP

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

By analyzing existing cross correlation between iShares MSCI EAFE and SPDR SP World, you can compare the effects of market volatilities on IShares MSCI and SPDR SP 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 IShares MSCI with a short position of SPDR SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares MSCI and SPDR SP.

Diversification Opportunities for IShares MSCI and SPDR SP

1.0

Correlation Coefficient

IShares MSCI  SPDR SP

No risk reduction

The 3 months correlation between IShares and SPDR is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI EAFE and SPDR SP World in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP World and IShares MSCI 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 iShares MSCI EAFE are associated (or correlated) with SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP World has no effect on the direction of IShares MSCI i.e., IShares MSCI and SPDR SP go up and down completely randomly.

Pair Corralation between IShares MSCI and SPDR SP

Considering the 90-day investment horizon IShares MSCI is expected to generate 1.06 times less return on investment than SPDR SP. But when comparing it to its historical volatility, iShares MSCI EAFE is 1.01 times less risky than SPDR SP. It trades about 0.22 of its potential returns per unit of risk. SPDR SP World is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  3,374  in SPDR SP World on July 6, 2024 and sell it today you would earn a total of  321.00  from holding SPDR SP World or generate 9.51% return on investment over 90 days.

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

iShares MSCI EAFE  vs.  SPDR SP World

iShares MSCI EAFE

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI EAFE are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong technical and fundamental indicators, IShares MSCI is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

SPDR SP World

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP World are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable fundamental indicators, SPDR SP is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with IShares MSCI and SPDR SP

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

The idea behind iShares MSCI EAFE and SPDR SP World 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.

Check out your portfolio center.

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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.