Correlation Between Vanguard Bond and First Trust

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

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

Diversification Opportunities for Vanguard Bond and First Trust

0.46

Correlation Coefficient

Vanguard Bond  First Trust

Very weak diversification

The 3 months correlation between Vanguard and First is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Bond Index and First Trust Exchange Traded in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Exchange and Vanguard Bond 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 Vanguard Bond Index 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 Exchange has no effect on the direction of Vanguard Bond i.e., Vanguard Bond and First Trust go up and down completely randomly.

Pair Corralation between Vanguard Bond and First Trust

Assuming the 90 days trading horizon Vanguard Bond Index is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, Vanguard Bond Index is 1.57 times less risky than First Trust. The etf trades about -0.09 of its potential returns per unit of risk. The First Trust Exchange Traded is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  485,000  in First Trust Exchange Traded on September 16, 2024 and sell it today you would earn a total of  32,385  from holding First Trust Exchange Traded or generate 6.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	94.74%
Values	Daily Returns

Vanguard Bond Index  vs.  First Trust Exchange Traded

Vanguard Bond Index

Risk-Adjusted Performance

0 of 100

Very Weak

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

First Trust Exchange

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange Traded are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, First Trust showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Bond and First Trust

The main advantage of trading using opposite Vanguard Bond and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Bond 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 Vanguard Bond Index and First Trust Exchange Traded 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.