Correlation Between MicroSectors FANG and Schwab TIPS

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

Diversification Opportunities for MicroSectors FANG and Schwab TIPS

-0.61

Correlation Coefficient

MicroSectors FANG  Schwab TIPS

Excellent diversification

The 3 months correlation between MicroSectors and Schwab is -0.61. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Schwab TIPS ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab TIPS ETF 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 Schwab TIPS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab TIPS ETF has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Schwab TIPS go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Schwab TIPS

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 9.4 times more return on investment than Schwab TIPS. However, MicroSectors FANG is 9.4 times more volatile than Schwab TIPS ETF. It trades about 0.12 of its potential returns per unit of risk. Schwab TIPS ETF is currently generating about 0.06 per unit of risk. If you would invest  3,733  in MicroSectors FANG Index on October 5, 2024 and sell it today you would earn a total of  5,864  from holding MicroSectors FANG Index or generate 157.09% 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.  Schwab TIPS ETF

MicroSectors FANG Index

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain technical and fundamental indicators, MicroSectors FANG displayed solid returns over the last few months and may actually be approaching a breakup point.

Schwab TIPS ETF

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Schwab TIPS ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical indicators, Schwab TIPS is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with MicroSectors FANG and Schwab TIPS

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

The idea behind MicroSectors FANG Index and Schwab TIPS ETF 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.