Correlation Between MicroSectors FANG and SPDR SP

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG 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 MicroSectors FANG and SPDR SP 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 SPDR SP Software, you can compare the effects of market volatilities on MicroSectors FANG 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 MicroSectors FANG with a short position of SPDR SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and SPDR SP.

Diversification Opportunities for MicroSectors FANG and SPDR SP

0.6

Correlation Coefficient

MicroSectors FANG  SPDR SP

Poor diversification

The 3 months correlation between MicroSectors and SPDR is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and SPDR SP Software in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP Software 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 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 Software has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and SPDR SP go up and down completely randomly.

Pair Corralation between MicroSectors FANG and SPDR SP

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 1.31 times more return on investment than SPDR SP. However, MicroSectors FANG is 1.31 times more volatile than SPDR SP Software. It trades about 0.2 of its potential returns per unit of risk. SPDR SP Software is currently generating about 0.02 per unit of risk. If you would invest  9,276  in MicroSectors FANG Index on May 18, 2025 and sell it today you would earn a total of  2,306  from holding MicroSectors FANG Index or generate 24.86% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  SPDR SP Software

MicroSectors FANG Index

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 15 (%) 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.

SPDR SP Software

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP Software are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, SPDR SP is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with MicroSectors FANG and SPDR SP

The main advantage of trading using opposite MicroSectors FANG and SPDR SP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MicroSectors FANG 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 MicroSectors FANG Index and SPDR SP Software 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..