Correlation Between IShares Russell and SPDR SP

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

By analyzing existing cross correlation between iShares Russell 2000 and SPDR SP MIDCAP, you can compare the effects of market volatilities on IShares Russell and SPDR SP 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 Russell with a short position of SPDR SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Russell and SPDR SP.

Diversification Opportunities for IShares Russell and SPDR SP

0.95

Correlation Coefficient

IShares Russell  SPDR SP

Almost no diversification

The 3 months correlation between IShares and SPDR is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding iShares Russell 2000 and SPDR SP MIDCAP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP MIDCAP and IShares Russell 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 Russell 2000 are associated (or correlated) with SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP MIDCAP has no effect on the direction of IShares Russell i.e., IShares Russell and SPDR SP go up and down completely randomly.

Pair Corralation between IShares Russell and SPDR SP

Considering the 90-day investment horizon iShares Russell 2000 is expected to under-perform the SPDR SP. In addition to that, IShares Russell is 1.15 times more volatile than SPDR SP MIDCAP. It trades about -0.24 of its total potential returns per unit of risk. SPDR SP MIDCAP is currently generating about -0.24 per unit of volatility. If you would invest  59,130  in SPDR SP MIDCAP on November 28, 2024 and sell it today you would lose (2,575) from holding SPDR SP MIDCAP or give up 4.35% of portfolio value over 90 days.

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

iShares Russell 2000  vs.  SPDR SP MIDCAP

iShares Russell 2000

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Russell 2000 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Etf's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the ETF investors.

SPDR SP MIDCAP

Risk-Adjusted Performance

Very Weak

Over the last 90 days SPDR SP MIDCAP has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Etf's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the ETF investors.

Pair Trading with IShares Russell and SPDR SP

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

The idea behind iShares Russell 2000 and SPDR SP MIDCAP 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.