Correlation Between SPDR SP and Financial Select

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

By analyzing existing cross correlation between SPDR SP 500 and Financial Select Sector, you can compare the effects of market volatilities on SPDR SP and Financial Select 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 SPDR SP with a short position of Financial Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Financial Select.

Diversification Opportunities for SPDR SP and Financial Select

0.86

Correlation Coefficient

SPDR SP  Financial Select

Very poor diversification

The 3 months correlation between SPDR and Financial is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 and Financial Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Financial Select Sector and SPDR SP 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 SPDR SP 500 are associated (or correlated) with Financial Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Financial Select Sector has no effect on the direction of SPDR SP i.e., SPDR SP and Financial Select go up and down completely randomly.

Pair Corralation between SPDR SP and Financial Select

Considering the 90-day investment horizon SPDR SP 500 is expected to generate 1.14 times more return on investment than Financial Select. However, SPDR SP is 1.14 times more volatile than Financial Select Sector. It trades about 0.06 of its potential returns per unit of risk. Financial Select Sector is currently generating about 0.06 per unit of risk. If you would invest  56,543  in SPDR SP 500 on February 17, 2025 and sell it today you would earn a total of  2,877  from holding SPDR SP 500 or generate 5.09% return on investment over 90 days.

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

SPDR SP 500  vs.  Financial Select Sector

SPDR SP 500

Risk-Adjusted Performance

Very Weak

Over the last 90 days SPDR SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, SPDR SP is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Financial Select Sector

Risk-Adjusted Performance

Very Weak

Over the last 90 days Financial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, Financial Select is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with SPDR SP and Financial Select

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

The idea behind SPDR SP 500 and Financial Select Sector 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.