Correlation Between IShares Industrials and Industrial Select

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

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

Diversification Opportunities for IShares Industrials and Industrial Select

0.87

Correlation Coefficient

IShares Industrials  Industrial Select

Very poor diversification

The 3 months correlation between IShares and Industrial is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding iShares Industrials ETF and Industrial Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Industrial Select Sector and IShares Industrials 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 Industrials ETF are associated (or correlated) with Industrial Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Industrial Select Sector has no effect on the direction of IShares Industrials i.e., IShares Industrials and Industrial Select go up and down completely randomly.

Pair Corralation between IShares Industrials and Industrial Select

Considering the 90-day investment horizon iShares Industrials ETF is expected to under-perform the Industrial Select. In addition to that, IShares Industrials is 1.03 times more volatile than Industrial Select Sector. It trades about -0.05 of its total potential returns per unit of risk. Industrial Select Sector is currently generating about -0.01 per unit of volatility. If you would invest  13,152  in Industrial Select Sector on December 29, 2024 and sell it today you would lose (137.00) from holding Industrial Select Sector or give up 1.04% of portfolio value over 90 days.

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

iShares Industrials ETF  vs.  Industrial Select Sector

iShares Industrials ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Industrials ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively steady basic indicators, IShares Industrials is not utilizing all of its potentials. The latest stock price chaos, may contribute to medium-term losses for the stakeholders.

Industrial Select Sector

Risk-Adjusted Performance

Very Weak

Over the last 90 days Industrial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Industrial Select is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with IShares Industrials and Industrial Select

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

The idea behind iShares Industrials ETF and Industrial 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.