Correlation Between IShares MSCI and Vanguard Extended

Can any of the company-specific risk be diversified away by investing in both IShares MSCI and Vanguard Extended 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 Extended 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 Extended Market, you can compare the effects of market volatilities on IShares MSCI and Vanguard Extended 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 Extended. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares MSCI and Vanguard Extended.

Diversification Opportunities for IShares MSCI and Vanguard Extended

0.92

Correlation Coefficient

IShares MSCI  Vanguard Extended

Almost no diversification

The 3 months correlation between IShares and Vanguard is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI USA and Vanguard Extended Market in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Extended Market 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 Extended. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Extended Market has no effect on the direction of IShares MSCI i.e., IShares MSCI and Vanguard Extended go up and down completely randomly.

Pair Corralation between IShares MSCI and Vanguard Extended

Given the investment horizon of 90 days iShares MSCI USA is expected to under-perform the Vanguard Extended. But the etf apears to be less risky and, when comparing its historical volatility, iShares MSCI USA is 1.53 times less risky than Vanguard Extended. The etf trades about -0.04 of its potential returns per unit of risk. The Vanguard Extended Market is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  18,530  in Vanguard Extended Market on October 13, 2024 and sell it today you would earn a total of  366.00  from holding Vanguard Extended Market or generate 1.98% return on investment over 90 days.

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

iShares MSCI USA  vs.  Vanguard Extended Market

iShares MSCI USA

Risk-Adjusted Performance

0 of 100

Very Weak

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

Vanguard Extended Market

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Extended Market are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Vanguard Extended is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with IShares MSCI and Vanguard Extended

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

The idea behind iShares MSCI USA and Vanguard Extended Market 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.