Correlation Between First Trust and Vanguard

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

By analyzing existing cross correlation between First Trust NASDAQ 100 and Vanguard SP 500, you can compare the effects of market volatilities on First Trust and Vanguard 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 First Trust with a short position of Vanguard. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Vanguard.

Diversification Opportunities for First Trust and Vanguard

0.96

Correlation Coefficient

First Trust  Vanguard

Almost no diversification

The 3 months correlation between First and Vanguard is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding First Trust NASDAQ 100 and Vanguard SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP 500 and First Trust 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 First Trust NASDAQ 100 are associated (or correlated) with Vanguard. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard SP 500 has no effect on the direction of First Trust i.e., First Trust and Vanguard go up and down completely randomly.

Pair Corralation between First Trust and Vanguard

Given the investment horizon of 90 days First Trust is expected to generate 1.45 times less return on investment than Vanguard. In addition to that, First Trust is 1.43 times more volatile than Vanguard SP 500. It trades about 0.16 of its total potential returns per unit of risk. Vanguard SP 500 is currently generating about 0.33 per unit of volatility. If you would invest  54,073  in Vanguard SP 500 on September 19, 2024 and sell it today you would earn a total of  1,472  from holding Vanguard SP 500 or generate 2.72% return on investment over 90 days.

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

First Trust NASDAQ 100  vs.  Vanguard SP 500

First Trust NASDAQ

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust NASDAQ 100 are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, First Trust is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Vanguard SP 500

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Vanguard is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with First Trust and Vanguard

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

The idea behind First Trust NASDAQ 100 and Vanguard SP 500 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.