Correlation Between IShares National and Vanguard Tax

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

By analyzing existing cross correlation between iShares National Muni and Vanguard Tax Exempt Bond, you can compare the effects of market volatilities on IShares National and Vanguard Tax 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 National with a short position of Vanguard Tax. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares National and Vanguard Tax.

Diversification Opportunities for IShares National and Vanguard Tax

0.92

Correlation Coefficient

IShares National  Vanguard Tax

Almost no diversification

The 3 months correlation between IShares and Vanguard is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding iShares National Muni and Vanguard Tax Exempt Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Tax Exempt and IShares National 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 National Muni are associated (or correlated) with Vanguard Tax. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Tax Exempt has no effect on the direction of IShares National i.e., IShares National and Vanguard Tax go up and down completely randomly.

Pair Corralation between IShares National and Vanguard Tax

Considering the 90-day investment horizon iShares National Muni is expected to under-perform the Vanguard Tax. But the etf apears to be less risky and, when comparing its historical volatility, iShares National Muni is 1.04 times less risky than Vanguard Tax. The etf trades about -0.09 of its potential returns per unit of risk. The Vanguard Tax Exempt Bond is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  4,988  in Vanguard Tax Exempt Bond on December 29, 2024 and sell it today you would lose (34.00) from holding Vanguard Tax Exempt Bond or give up 0.68% of portfolio value over 90 days.

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

iShares National Muni  vs.  Vanguard Tax Exempt Bond

iShares National Muni

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares National Muni has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, IShares National is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Tax Exempt

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Tax Exempt Bond has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong technical and fundamental indicators, Vanguard Tax is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with IShares National and Vanguard Tax

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

The idea behind iShares National Muni and Vanguard Tax Exempt Bond 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.