Correlation Between IShares Financials and SPDR SP

Can any of the company-specific risk be diversified away by investing in both IShares Financials 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 Financials 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 Financials ETF and SPDR SP Capital, you can compare the effects of market volatilities on IShares Financials 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 Financials with a short position of SPDR SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Financials and SPDR SP.

Diversification Opportunities for IShares Financials and SPDR SP

0.75

Correlation Coefficient

IShares Financials  SPDR SP

Poor diversification

The 3 months correlation between IShares and SPDR is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding iShares Financials ETF and SPDR SP Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP Capital 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 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 Capital has no effect on the direction of IShares Financials i.e., IShares Financials and SPDR SP go up and down completely randomly.

Pair Corralation between IShares Financials and SPDR SP

Considering the 90-day investment horizon iShares Financials ETF is expected to generate 0.8 times more return on investment than SPDR SP. However, iShares Financials ETF is 1.24 times less risky than SPDR SP. It trades about 0.02 of its potential returns per unit of risk. SPDR SP Capital is currently generating about -0.07 per unit of risk. If you would invest  11,719  in iShares Financials ETF on December 1, 2024 and sell it today you would earn a total of  121.00  from holding iShares Financials ETF or generate 1.03% return on investment over 90 days.

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

iShares Financials ETF  vs.  SPDR SP Capital

iShares Financials ETF

Risk-Adjusted Performance

Weak

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

SPDR SP Capital

Risk-Adjusted Performance

Very Weak

Over the last 90 days SPDR SP Capital has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, SPDR SP is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with IShares Financials and SPDR SP

The main advantage of trading using opposite IShares Financials and SPDR SP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Financials 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 Financials ETF and SPDR SP Capital 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.