Correlation Between IShares Energy and Energy Select

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

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

Diversification Opportunities for IShares Energy and Energy Select

0.99

Correlation Coefficient

IShares Energy  Energy Select

No risk reduction

The 3 months correlation between IShares and Energy is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding iShares Energy ETF and Energy Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Select Sector and IShares Energy 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 Energy ETF are associated (or correlated) with Energy Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Select Sector has no effect on the direction of IShares Energy i.e., IShares Energy and Energy Select go up and down completely randomly.

Pair Corralation between IShares Energy and Energy Select

Considering the 90-day investment horizon IShares Energy is expected to generate 1.11 times less return on investment than Energy Select. In addition to that, IShares Energy is 1.0 times more volatile than Energy Select Sector. It trades about 0.12 of its total potential returns per unit of risk. Energy Select Sector is currently generating about 0.14 per unit of volatility. If you would invest  8,390  in Energy Select Sector on December 28, 2024 and sell it today you would earn a total of  897.00  from holding Energy Select Sector or generate 10.69% return on investment over 90 days.

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

iShares Energy ETF  vs.  Energy Select Sector

iShares Energy ETF

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Energy ETF are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating basic indicators, IShares Energy may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Energy Select Sector

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Energy Select may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with IShares Energy and Energy Select

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

The idea behind iShares Energy ETF and Energy Select Sector 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.