Correlation Between MicroSectors FANG and WisdomTree SmallCap

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG and WisdomTree SmallCap 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 WisdomTree SmallCap 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 WisdomTree SmallCap Earnings, you can compare the effects of market volatilities on MicroSectors FANG and WisdomTree SmallCap 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 WisdomTree SmallCap. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and WisdomTree SmallCap.

Diversification Opportunities for MicroSectors FANG and WisdomTree SmallCap

0.53

Correlation Coefficient

MicroSectors FANG  WisdomTree SmallCap

Very weak diversification

The 3 months correlation between MicroSectors and WisdomTree is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and WisdomTree SmallCap Earnings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree SmallCap 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 WisdomTree SmallCap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree SmallCap has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and WisdomTree SmallCap go up and down completely randomly.

Pair Corralation between MicroSectors FANG and WisdomTree SmallCap

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 1.75 times more return on investment than WisdomTree SmallCap. However, MicroSectors FANG is 1.75 times more volatile than WisdomTree SmallCap Earnings. It trades about 0.27 of its potential returns per unit of risk. WisdomTree SmallCap Earnings is currently generating about 0.17 per unit of risk. If you would invest  7,955  in MicroSectors FANG Index on May 1, 2025 and sell it today you would earn a total of  3,200  from holding MicroSectors FANG Index or generate 40.23% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  WisdomTree SmallCap Earnings

MicroSectors FANG Index

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain technical and fundamental indicators, MicroSectors FANG displayed solid returns over the last few months and may actually be approaching a breakup point.

WisdomTree SmallCap

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in WisdomTree SmallCap Earnings are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating technical and fundamental indicators, WisdomTree SmallCap unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with MicroSectors FANG and WisdomTree SmallCap

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

The idea behind MicroSectors FANG Index and WisdomTree SmallCap Earnings 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.