Correlation Between MicroSectors FANG and Alpha Architect

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG and Alpha Architect 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 MicroSectors FANG and Alpha Architect into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between MicroSectors FANG Index and Alpha Architect Quantitative, you can compare the effects of market volatilities on MicroSectors FANG and Alpha Architect 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 MicroSectors FANG with a short position of Alpha Architect. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and Alpha Architect.

Diversification Opportunities for MicroSectors FANG and Alpha Architect

-0.95

Correlation Coefficient

MicroSectors FANG  Alpha Architect

Pay attention - limited upside

The 3 months correlation between MicroSectors and Alpha is -0.95. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Alpha Architect Quantitative in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alpha Architect Quan and MicroSectors FANG 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 MicroSectors FANG Index are associated (or correlated) with Alpha Architect. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alpha Architect Quan has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Alpha Architect go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Alpha Architect

Given the investment horizon of 90 days MicroSectors FANG Index is expected to under-perform the Alpha Architect. In addition to that, MicroSectors FANG is 3.61 times more volatile than Alpha Architect Quantitative. It trades about -0.28 of its total potential returns per unit of risk. Alpha Architect Quantitative is currently generating about 0.13 per unit of volatility. If you would invest  5,985  in Alpha Architect Quantitative on May 3, 2025 and sell it today you would earn a total of  399.00  from holding Alpha Architect Quantitative or generate 6.67% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  Alpha Architect Quantitative

MicroSectors FANG Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days MicroSectors FANG Index has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Etf's technical and fundamental indicators remain rather sound which may send shares a bit higher in September 2025. The latest tumult may also be a sign of longer-term up-swing for the fund shareholders.

Alpha Architect Quan

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alpha Architect Quantitative are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Alpha Architect may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with MicroSectors FANG and Alpha Architect

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

The idea behind MicroSectors FANG Index and Alpha Architect Quantitative 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.