Correlation Between IShares SP and Vanguard

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

By analyzing existing cross correlation between iShares SP 500 and Vanguard SP Small Cap, you can compare the effects of market volatilities on IShares SP and Vanguard 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 SP with a short position of Vanguard. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares SP and Vanguard.

Diversification Opportunities for IShares SP and Vanguard

0.8

Correlation Coefficient

IShares SP  Vanguard

Very poor diversification

The 3 months correlation between IShares and Vanguard is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding iShares SP 500 and Vanguard SP Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP Small and IShares SP 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 SP 500 are associated (or correlated) with Vanguard. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard SP Small has no effect on the direction of IShares SP i.e., IShares SP and Vanguard go up and down completely randomly.

Pair Corralation between IShares SP and Vanguard

Considering the 90-day investment horizon iShares SP 500 is expected to under-perform the Vanguard. But the etf apears to be less risky and, when comparing its historical volatility, iShares SP 500 is 1.92 times less risky than Vanguard. The etf trades about -0.04 of its potential returns per unit of risk. The Vanguard SP Small Cap is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  10,661  in Vanguard SP Small Cap on September 29, 2024 and sell it today you would lose (1.00) from holding Vanguard SP Small Cap or give up 0.01% of portfolio value over 90 days.

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

iShares SP 500  vs.  Vanguard SP Small Cap

iShares SP 500

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, IShares SP is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Vanguard SP Small

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard SP Small Cap has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Vanguard is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with IShares SP and Vanguard

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

The idea behind iShares SP 500 and Vanguard SP Small Cap 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.