Correlation Between MicroSectors FANG and Invesco DWA

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

Diversification Opportunities for MicroSectors FANG and Invesco DWA

0.67

Correlation Coefficient

MicroSectors FANG  Invesco DWA

Poor diversification

The 3 months correlation between MicroSectors and Invesco is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Invesco DWA Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco DWA Energy 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 Invesco DWA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco DWA Energy has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Invesco DWA go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Invesco DWA

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 1.36 times more return on investment than Invesco DWA. However, MicroSectors FANG is 1.36 times more volatile than Invesco DWA Energy. It trades about 0.52 of its potential returns per unit of risk. Invesco DWA Energy is currently generating about -0.12 per unit of risk. If you would invest  7,965  in MicroSectors FANG Index on September 16, 2024 and sell it today you would earn a total of  1,922  from holding MicroSectors FANG Index or generate 24.13% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  Invesco DWA Energy

MicroSectors FANG Index

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating technical and fundamental indicators, MicroSectors FANG displayed solid returns over the last few months and may actually be approaching a breakup point.

Invesco DWA Energy

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco DWA Energy are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady basic indicators, Invesco DWA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with MicroSectors FANG and Invesco DWA

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

The idea behind MicroSectors FANG Index and Invesco DWA Energy 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.