Correlation Between First Trust and Select Sector

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

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

Diversification Opportunities for First Trust and Select Sector

0.83

Correlation Coefficient

First Trust  Select Sector

Very poor diversification

The 3 months correlation between First and Select is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Exchange Traded and The Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Sector and First 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 First Trust Exchange Traded 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 First Trust i.e., First Trust and Select Sector go up and down completely randomly.

Pair Corralation between First Trust and Select Sector

Assuming the 90 days trading horizon First Trust Exchange Traded is expected to generate 1.2 times more return on investment than Select Sector. However, First Trust is 1.2 times more volatile than The Select Sector. It trades about 0.3 of its potential returns per unit of risk. The Select Sector is currently generating about 0.1 per unit of risk. If you would invest  395,200  in First Trust Exchange Traded on September 17, 2024 and sell it today you would earn a total of  122,185  from holding First Trust Exchange Traded or generate 30.92% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

First Trust Exchange Traded  vs.  The Select Sector

First Trust Exchange

Risk-Adjusted Performance

23 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange Traded are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, First Trust 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 First Trust and Select Sector

The main advantage of trading using opposite First Trust and Select Sector positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust 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 First Trust Exchange Traded 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.

Check out your portfolio center.

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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.