Correlation Between IShares Financials and Energy Select

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

Diversification Opportunities for IShares Financials and Energy Select

0.76

Correlation Coefficient

IShares Financials  Energy Select

Poor diversification

The 3 months correlation between IShares and Energy is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding iShares Financials 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 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 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 Financials i.e., IShares Financials and Energy Select go up and down completely randomly.

Pair Corralation between IShares Financials and Energy Select

Considering the 90-day investment horizon iShares Financials ETF is expected to generate 1.53 times more return on investment than Energy Select. However, IShares Financials is 1.53 times more volatile than Energy Select Sector. It trades about 0.29 of its potential returns per unit of risk. Energy Select Sector is currently generating about 0.24 per unit of risk. If you would invest  10,586  in iShares Financials ETF on September 5, 2024 and sell it today you would earn a total of  1,108  from holding iShares Financials ETF or generate 10.47% 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.  Energy Select Sector

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.

Energy Select Sector

Risk-Adjusted Performance

9 of 100

OK

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

Pair Trading with IShares Financials and Energy Select

The main advantage of trading using opposite IShares Financials and Energy Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Financials 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 Financials 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.