Correlation Between Technology Select and First Trust

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

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

Diversification Opportunities for Technology Select and First Trust

0.72

Correlation Coefficient

Technology Select  First Trust

Poor diversification

The 3 months correlation between Technology and First is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Technology Select Sector and First Trust NASDAQ in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust NASDAQ and Technology Select 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 Technology Select Sector are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust NASDAQ has no effect on the direction of Technology Select i.e., Technology Select and First Trust go up and down completely randomly.

Pair Corralation between Technology Select and First Trust

Considering the 90-day investment horizon Technology Select Sector is expected to generate 1.02 times more return on investment than First Trust. However, Technology Select is 1.02 times more volatile than First Trust NASDAQ. It trades about 0.25 of its potential returns per unit of risk. First Trust NASDAQ is currently generating about 0.24 per unit of risk. If you would invest  23,450  in Technology Select Sector on May 16, 2025 and sell it today you would earn a total of  3,381  from holding Technology Select Sector or generate 14.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.39%
Values	Daily Returns

Technology Select Sector  vs.  First Trust NASDAQ

Technology Select Sector

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Technology Select Sector are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite quite uncertain essential indicators, Technology Select disclosed solid returns over the last few months and may actually be approaching a breakup point.

First Trust NASDAQ

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust NASDAQ are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady forward indicators, First Trust showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Technology Select and First Trust

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

The idea behind Technology Select Sector and First Trust NASDAQ 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.