Correlation Between IShares Biotechnology and First Trust

Can any of the company-specific risk be diversified away by investing in both IShares Biotechnology and First Trust 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 IShares Biotechnology and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between iShares Biotechnology ETF and First Trust NYSE, you can compare the effects of market volatilities on IShares Biotechnology and First Trust 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 IShares Biotechnology with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Biotechnology and First Trust.

Diversification Opportunities for IShares Biotechnology and First Trust

0.85

Correlation Coefficient

IShares Biotechnology  First Trust

Very poor diversification

The 3 months correlation between IShares and First is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding iShares Biotechnology ETF and First Trust NYSE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust NYSE and IShares Biotechnology 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 iShares Biotechnology ETF are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust NYSE has no effect on the direction of IShares Biotechnology i.e., IShares Biotechnology and First Trust go up and down completely randomly.

Pair Corralation between IShares Biotechnology and First Trust

Considering the 90-day investment horizon IShares Biotechnology is expected to generate 1.95 times less return on investment than First Trust. But when comparing it to its historical volatility, iShares Biotechnology ETF is 1.03 times less risky than First Trust. It trades about 0.01 of its potential returns per unit of risk. First Trust NYSE is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  16,798  in First Trust NYSE on December 25, 2024 and sell it today you would earn a total of  239.00  from holding First Trust NYSE or generate 1.42% return on investment over 90 days.

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

iShares Biotechnology ETF  vs.  First Trust NYSE

iShares Biotechnology ETF

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Biotechnology ETF are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental drivers, IShares Biotechnology is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

First Trust NYSE

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust NYSE are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable fundamental drivers, First Trust is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with IShares Biotechnology and First Trust

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

The idea behind iShares Biotechnology ETF and First Trust NYSE 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.

Check out your portfolio center.

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.