Correlation Between MicroSectors FANG and First Trust

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

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

Diversification Opportunities for MicroSectors FANG and First Trust

-0.45

Correlation Coefficient

MicroSectors FANG  First Trust

Very good diversification

The 3 months correlation between MicroSectors and First is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and First Trust Tactical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Tactical and MicroSectors FANG 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 MicroSectors FANG Index are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Tactical has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and First Trust go up and down completely randomly.

Pair Corralation between MicroSectors FANG and First Trust

Given the investment horizon of 90 days MicroSectors FANG Index is expected to under-perform the First Trust. In addition to that, MicroSectors FANG is 21.9 times more volatile than First Trust Tactical. It trades about -0.02 of its total potential returns per unit of risk. First Trust Tactical is currently generating about 0.08 per unit of volatility. If you would invest  4,122  in First Trust Tactical on December 1, 2024 and sell it today you would earn a total of  44.00  from holding First Trust Tactical or generate 1.07% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  First Trust Tactical

MicroSectors FANG Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days MicroSectors FANG Index has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Etf's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the fund shareholders.

First Trust Tactical

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Tactical are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable essential indicators, First Trust is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with MicroSectors FANG and First Trust

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

The idea behind MicroSectors FANG Index and First Trust Tactical 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.