Correlation Between MicroSectors FANG and Vanguard Energy

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

Diversification Opportunities for MicroSectors FANG and Vanguard Energy

-0.77

Correlation Coefficient

MicroSectors FANG  Vanguard Energy

Pay attention - limited upside

The 3 months correlation between MicroSectors and Vanguard is -0.77. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Vanguard Energy Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Energy Index 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 Vanguard Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Energy Index has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Vanguard Energy go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Vanguard Energy

Given the investment horizon of 90 days MicroSectors FANG Index is expected to under-perform the Vanguard Energy. In addition to that, MicroSectors FANG is 3.01 times more volatile than Vanguard Energy Index. It trades about -0.22 of its total potential returns per unit of risk. Vanguard Energy Index is currently generating about 0.1 per unit of volatility. If you would invest  11,819  in Vanguard Energy Index on September 13, 2024 and sell it today you would earn a total of  881.00  from holding Vanguard Energy Index or generate 7.45% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  Vanguard Energy Index

MicroSectors FANG Index

Risk-Adjusted Performance

0 of 100

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 uncertain performance in the last few months, the Etf's technical and fundamental indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the fund shareholders.

Vanguard Energy Index

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Energy Index are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent fundamental indicators, Vanguard Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with MicroSectors FANG and Vanguard Energy

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

The idea behind MicroSectors FANG Index and Vanguard Energy 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.