Correlation Between Schwab TIPS and Schwab Aggregate

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

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

Diversification Opportunities for Schwab TIPS and Schwab Aggregate

0.97

Correlation Coefficient

Schwab TIPS  Schwab Aggregate

Almost no diversification

The 3 months correlation between Schwab and Schwab is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Schwab TIPS ETF and Schwab Aggregate Bond in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Aggregate Bond and Schwab TIPS 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 Schwab TIPS ETF are associated (or correlated) with Schwab Aggregate. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Aggregate Bond has no effect on the direction of Schwab TIPS i.e., Schwab TIPS and Schwab Aggregate go up and down completely randomly.

Pair Corralation between Schwab TIPS and Schwab Aggregate

Given the investment horizon of 90 days Schwab TIPS ETF is expected to under-perform the Schwab Aggregate. But the etf apears to be less risky and, when comparing its historical volatility, Schwab TIPS ETF is 1.4 times less risky than Schwab Aggregate. The etf trades about -0.13 of its potential returns per unit of risk. The Schwab Aggregate Bond is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  2,290  in Schwab Aggregate Bond on September 20, 2024 and sell it today you would lose (9.00) from holding Schwab Aggregate Bond or give up 0.39% of portfolio value over 90 days.

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

Schwab TIPS ETF  vs.  Schwab Aggregate Bond

Schwab TIPS ETF

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Schwab TIPS ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable technical indicators, Schwab TIPS is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Schwab Aggregate Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Schwab Aggregate Bond has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical indicators, Schwab Aggregate is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Schwab TIPS and Schwab Aggregate

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

The idea behind Schwab TIPS ETF and Schwab Aggregate 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.