Correlation Between IShares Global and IShares Financials

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

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

Diversification Opportunities for IShares Global and IShares Financials

0.62

Correlation Coefficient

IShares Global  IShares Financials

Poor diversification

The 3 months correlation between IShares and IShares is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding iShares Global Energy and iShares Financials ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Financials ETF and IShares Global 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 Global Energy are associated (or correlated) with IShares Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Financials ETF has no effect on the direction of IShares Global i.e., IShares Global and IShares Financials go up and down completely randomly.

Pair Corralation between IShares Global and IShares Financials

Considering the 90-day investment horizon IShares Global is expected to generate 3.6 times less return on investment than IShares Financials. But when comparing it to its historical volatility, iShares Global Energy is 1.16 times less risky than IShares Financials. It trades about 0.06 of its potential returns per unit of risk. iShares Financials ETF is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  10,344  in iShares Financials ETF on September 4, 2024 and sell it today you would earn a total of  1,422  from holding iShares Financials ETF or generate 13.75% return on investment over 90 days.

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

iShares Global Energy  vs.  iShares Financials ETF

iShares Global Energy

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Global Energy are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, IShares Global is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

iShares Financials ETF

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Financials ETF are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, IShares Financials reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with IShares Global and IShares Financials

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

The idea behind iShares Global Energy and iShares Financials ETF 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.