Correlation Between IShares MSCI and Vanguard Mid

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

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

Diversification Opportunities for IShares MSCI and Vanguard Mid

1.0

Correlation Coefficient

IShares MSCI  Vanguard Mid

No risk reduction

The 3 months correlation between IShares and Vanguard is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI USA and Vanguard Mid Cap Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Mid Cap and IShares MSCI 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 MSCI USA are associated (or correlated) with Vanguard Mid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Mid Cap has no effect on the direction of IShares MSCI i.e., IShares MSCI and Vanguard Mid go up and down completely randomly.

Pair Corralation between IShares MSCI and Vanguard Mid

Given the investment horizon of 90 days iShares MSCI USA is expected to under-perform the Vanguard Mid. But the etf apears to be less risky and, when comparing its historical volatility, iShares MSCI USA is 1.09 times less risky than Vanguard Mid. The etf trades about -0.33 of its potential returns per unit of risk. The Vanguard Mid Cap Index is currently generating about -0.3 of returns per unit of risk over similar time horizon. If you would invest  28,396  in Vanguard Mid Cap Index on September 24, 2024 and sell it today you would lose (1,604) from holding Vanguard Mid Cap Index or give up 5.65% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.24%
Values	Daily Returns

iShares MSCI USA  vs.  Vanguard Mid Cap Index

iShares MSCI USA

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI USA are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, IShares MSCI is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Mid Cap

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Mid Cap Index are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Vanguard Mid is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with IShares MSCI and Vanguard Mid

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

The idea behind iShares MSCI USA and Vanguard Mid Cap Index 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.