Correlation Between VanEck Defense and Source KBW

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

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

Diversification Opportunities for VanEck Defense and Source KBW

0.8

Correlation Coefficient

VanEck Defense  Source KBW

Very poor diversification

The 3 months correlation between VanEck and Source is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding VanEck Defense ETF and Source KBW NASDAQ in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Source KBW NASDAQ and VanEck Defense 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 Defense ETF are associated (or correlated) with Source KBW. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Source KBW NASDAQ has no effect on the direction of VanEck Defense i.e., VanEck Defense and Source KBW go up and down completely randomly.

Pair Corralation between VanEck Defense and Source KBW

Assuming the 90 days trading horizon VanEck Defense ETF is expected to generate 1.13 times more return on investment than Source KBW. However, VanEck Defense is 1.13 times more volatile than Source KBW NASDAQ. It trades about -0.1 of its potential returns per unit of risk. Source KBW NASDAQ is currently generating about -0.32 per unit of risk. If you would invest  3,562  in VanEck Defense ETF on September 27, 2024 and sell it today you would lose (80.00) from holding VanEck Defense ETF or give up 2.25% of portfolio value over 90 days.

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

VanEck Defense ETF  vs.  Source KBW NASDAQ

VanEck Defense ETF

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in VanEck Defense ETF are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, VanEck Defense may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Source KBW NASDAQ

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Source KBW NASDAQ are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile forward-looking signals, Source KBW exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with VanEck Defense and Source KBW

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

The idea behind VanEck Defense ETF and Source KBW 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.

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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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.