Correlation Between Direxion Shares and Select Sector

Can any of the company-specific risk be diversified away by investing in both Direxion Shares and Select Sector 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 Direxion Shares and Select Sector into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Direxion Shares ETF and The Select Sector, you can compare the effects of market volatilities on Direxion Shares and Select Sector 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 Direxion Shares with a short position of Select Sector. Check out your portfolio center. Please also check ongoing floating volatility patterns of Direxion Shares and Select Sector.

Diversification Opportunities for Direxion Shares and Select Sector

0.92

Correlation Coefficient

Direxion Shares  Select Sector

Almost no diversification

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

Pair Corralation between Direxion Shares and Select Sector

Assuming the 90 days trading horizon Direxion Shares ETF is expected to generate 1.72 times more return on investment than Select Sector. However, Direxion Shares is 1.72 times more volatile than The Select Sector. It trades about -0.07 of its potential returns per unit of risk. The Select Sector is currently generating about -0.27 per unit of risk. If you would invest  336,100  in Direxion Shares ETF on September 17, 2024 and sell it today you would lose (11,000) from holding Direxion Shares ETF or give up 3.27% of portfolio value over 90 days.

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

Direxion Shares ETF  vs.  The Select Sector

Direxion Shares ETF

Risk-Adjusted Performance

11 of 100

Good

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

Select Sector

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak technical and fundamental indicators, Select Sector may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Direxion Shares and Select Sector

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

The idea behind Direxion Shares ETF and The Select Sector 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.