Correlation Between IShares Financials and First Trust

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

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

Diversification Opportunities for IShares Financials and First Trust

0.97

Correlation Coefficient

IShares Financials  First Trust

Almost no diversification

The 3 months correlation between IShares and First is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding iShares Financials ETF and First Trust Nasdaq in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Nasdaq and IShares Financials 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 Financials ETF are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Nasdaq has no effect on the direction of IShares Financials i.e., IShares Financials and First Trust go up and down completely randomly.

Pair Corralation between IShares Financials and First Trust

Considering the 90-day investment horizon iShares Financials ETF is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, iShares Financials ETF is 1.18 times less risky than First Trust. The etf trades about -0.18 of its potential returns per unit of risk. The First Trust Nasdaq is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  3,371  in First Trust Nasdaq on September 18, 2024 and sell it today you would lose (60.00) from holding First Trust Nasdaq or give up 1.78% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	95.24%
Values	Daily Returns

iShares Financials ETF  vs.  First Trust Nasdaq

iShares Financials ETF

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Financials ETF are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly inconsistent basic indicators, IShares Financials may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust Nasdaq

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Nasdaq are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, First Trust displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with IShares Financials and First Trust

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

The idea behind iShares Financials ETF and First Trust Nasdaq 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.