Correlation Between VanEck Biotech and First Trust

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

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

Diversification Opportunities for VanEck Biotech and First Trust

0.31

Correlation Coefficient

VanEck Biotech  First Trust

Weak diversification

The 3 months correlation between VanEck and First is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding VanEck Biotech ETF and First Trust Dow in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Dow and VanEck Biotech 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 VanEck Biotech ETF 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 Dow has no effect on the direction of VanEck Biotech i.e., VanEck Biotech and First Trust go up and down completely randomly.

Pair Corralation between VanEck Biotech and First Trust

Considering the 90-day investment horizon VanEck Biotech is expected to generate 7.13 times less return on investment than First Trust. But when comparing it to its historical volatility, VanEck Biotech ETF is 1.22 times less risky than First Trust. It trades about 0.02 of its potential returns per unit of risk. First Trust Dow is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  13,237  in First Trust Dow on December 2, 2024 and sell it today you would earn a total of  11,396  from holding First Trust Dow or generate 86.09% return on investment over 90 days.

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

VanEck Biotech ETF  vs.  First Trust Dow

VanEck Biotech ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days VanEck Biotech ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong fundamental drivers, VanEck Biotech is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

First Trust Dow

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Dow are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy fundamental indicators, First Trust is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with VanEck Biotech and First Trust

The main advantage of trading using opposite VanEck Biotech and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if VanEck Biotech 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 VanEck Biotech ETF and First Trust Dow 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.