Correlation Between SPDR Dow and IShares Financials

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

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

Diversification Opportunities for SPDR Dow and IShares Financials

0.59

Correlation Coefficient

SPDR Dow  IShares Financials

Very weak diversification

The 3 months correlation between SPDR and IShares is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding SPDR Dow Jones and iShares Financials ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Financials ETF and SPDR Dow 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 SPDR Dow Jones are associated (or correlated) with IShares Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Financials ETF has no effect on the direction of SPDR Dow i.e., SPDR Dow and IShares Financials go up and down completely randomly.

Pair Corralation between SPDR Dow and IShares Financials

Considering the 90-day investment horizon SPDR Dow is expected to generate 2.51 times less return on investment than IShares Financials. But when comparing it to its historical volatility, SPDR Dow Jones is 1.04 times less risky than IShares Financials. It trades about 0.02 of its potential returns per unit of risk. iShares Financials ETF is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  11,118  in iShares Financials ETF on December 27, 2024 and sell it today you would earn a total of  322.00  from holding iShares Financials ETF or generate 2.9% return on investment over 90 days.

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

SPDR Dow Jones  vs.  iShares Financials ETF

SPDR Dow Jones

Risk-Adjusted Performance

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR Dow Jones are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, SPDR Dow is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

iShares Financials ETF

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Financials ETF are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, IShares Financials is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with SPDR Dow and IShares Financials

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

The idea behind SPDR Dow Jones and iShares Financials ETF 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.

Check out your portfolio center.

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.