Correlation Between MicroSectors FANG and Innovator

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG and Innovator 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 Innovator 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 Innovator SP 500, you can compare the effects of market volatilities on MicroSectors FANG and Innovator 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 Innovator. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and Innovator.

Diversification Opportunities for MicroSectors FANG and Innovator

0.92

Correlation Coefficient

MicroSectors FANG  Innovator

Almost no diversification

The 3 months correlation between MicroSectors and Innovator is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Innovator SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Innovator SP 500 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 Innovator. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Innovator SP 500 has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Innovator go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Innovator

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 30.94 times more return on investment than Innovator. However, MicroSectors FANG is 30.94 times more volatile than Innovator SP 500. It trades about 0.23 of its potential returns per unit of risk. Innovator SP 500 is currently generating about 0.25 per unit of risk. If you would invest  38,380  in MicroSectors FANG Index on September 16, 2024 and sell it today you would earn a total of  25,938  from holding MicroSectors FANG Index or generate 67.58% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  Innovator SP 500

MicroSectors FANG Index

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating technical and fundamental indicators, MicroSectors FANG unveiled solid returns over the last few months and may actually be approaching a breakup point.

Innovator SP 500

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Innovator SP 500 are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound technical and fundamental indicators, Innovator is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with MicroSectors FANG and Innovator

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

The idea behind MicroSectors FANG Index and Innovator SP 500 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.