Correlation Between IShares Trust and SPDR Index

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

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

Diversification Opportunities for IShares Trust and SPDR Index

-0.66

Correlation Coefficient

IShares Trust  SPDR Index

Excellent diversification

The 3 months correlation between IShares and SPDR is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding iShares Trust and SPDR Index Shares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR Index Shares and IShares Trust 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 iShares Trust are associated (or correlated) with SPDR Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR Index Shares has no effect on the direction of IShares Trust i.e., IShares Trust and SPDR Index go up and down completely randomly.

Pair Corralation between IShares Trust and SPDR Index

Assuming the 90 days trading horizon iShares Trust is expected to under-perform the SPDR Index. But the etf apears to be less risky and, when comparing its historical volatility, iShares Trust is 4.5 times less risky than SPDR Index. The etf trades about -0.17 of its potential returns per unit of risk. The SPDR Index Shares is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  99,900  in SPDR Index Shares on December 30, 2024 and sell it today you would earn a total of  12,405  from holding SPDR Index Shares or generate 12.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	95.16%
Values	Daily Returns

iShares Trust   vs.  SPDR Index Shares

iShares Trust

Risk-Adjusted Performance

Very Weak

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

SPDR Index Shares

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR Index Shares are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, SPDR Index showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with IShares Trust and SPDR Index

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

The idea behind iShares Trust and SPDR Index Shares 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.