Correlation Between NYSE Composite and ETF Series

Can any of the company-specific risk be diversified away by investing in both NYSE Composite and ETF Series 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 NYSE Composite and ETF Series into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between NYSE Composite and ETF Series Solutions, you can compare the effects of market volatilities on NYSE Composite and ETF Series 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 NYSE Composite with a short position of ETF Series. Check out your portfolio center. Please also check ongoing floating volatility patterns of NYSE Composite and ETF Series.

Diversification Opportunities for NYSE Composite and ETF Series

0.49

Correlation Coefficient

NYSE Composite  ETF Series

Very weak diversification

The 3 months correlation between NYSE and ETF is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding NYSE Composite and ETF Series Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ETF Series Solutions and NYSE Composite 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 NYSE Composite are associated (or correlated) with ETF Series. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ETF Series Solutions has no effect on the direction of NYSE Composite i.e., NYSE Composite and ETF Series go up and down completely randomly.

Pair Corralation between NYSE Composite and ETF Series

Assuming the 90 days trading horizon NYSE Composite is expected to generate 5.88 times less return on investment than ETF Series. But when comparing it to its historical volatility, NYSE Composite is 1.51 times less risky than ETF Series. It trades about 0.1 of its potential returns per unit of risk. ETF Series Solutions is currently generating about 0.37 of returns per unit of risk over similar time horizon. If you would invest  1,985  in ETF Series Solutions on October 24, 2024 and sell it today you would earn a total of  108.00  from holding ETF Series Solutions or generate 5.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	5.69%
Values	Daily Returns

NYSE Composite  vs.  ETF Series Solutions

Pair Trading with NYSE Composite and ETF Series

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

The idea behind NYSE Composite and ETF Series Solutions 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.