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 Mid Cap and SPDR SP 400, 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

0.83

Correlation Coefficient

IShares Russell  SPDR SP

Very poor diversification

The 3 months correlation between IShares and SPDR is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding iShares Russell Mid Cap and SPDR SP 400 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP 400 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 Mid Cap 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 400 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 Mid Cap is expected to under-perform the SPDR SP. In addition to that, IShares Russell is 1.32 times more volatile than SPDR SP 400. It trades about -0.22 of its total potential returns per unit of risk. SPDR SP 400 is currently generating about -0.27 per unit of volatility. If you would invest  9,323  in SPDR SP 400 on October 7, 2024 and sell it today you would lose (512.00) from holding SPDR SP 400 or give up 5.49% of portfolio value over 90 days.

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

iShares Russell Mid Cap  vs.  SPDR SP 400

iShares Russell Mid

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Russell Mid Cap are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain basic indicators, IShares Russell may actually be approaching a critical reversion point that can send shares even higher in February 2025.

SPDR SP 400

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 400 are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, SPDR SP is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

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 Mid Cap and SPDR SP 400 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.