Correlation Between MicroSectors FANG and Northern Lights

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

Diversification Opportunities for MicroSectors FANG and Northern Lights

0.26

Correlation Coefficient

MicroSectors FANG  Northern Lights

Modest diversification

The 3 months correlation between MicroSectors and Northern is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights 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 Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Northern Lights go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Northern Lights

Given the investment horizon of 90 days MicroSectors FANG Index is expected to under-perform the Northern Lights. In addition to that, MicroSectors FANG is 8.54 times more volatile than Northern Lights. It trades about -0.09 of its total potential returns per unit of risk. Northern Lights is currently generating about 0.02 per unit of volatility. If you would invest  2,856  in Northern Lights on December 29, 2024 and sell it today you would earn a total of  17.00  from holding Northern Lights or generate 0.6% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  Northern Lights

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 uncertain performance in the last few months, the Etf's technical and fundamental indicators remain very healthy which may send shares a bit higher in April 2025. The recent disarray may also be a sign of long period up-swing for the ETF investors.

Northern Lights

Risk-Adjusted Performance

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Northern Lights is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with MicroSectors FANG and Northern Lights

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

The idea behind MicroSectors FANG Index and Northern Lights 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.