Correlation Between SPDR SP and Vanguard

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

By analyzing existing cross correlation between SPDR SP 600 and Vanguard SP Small Cap, you can compare the effects of market volatilities on SPDR SP 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 SPDR SP with a short position of Vanguard. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Vanguard.

Diversification Opportunities for SPDR SP and Vanguard

1.0

Correlation Coefficient

SPDR SP  Vanguard

No risk reduction

The 3 months correlation between SPDR and Vanguard is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 600 and Vanguard SP Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP Small and SPDR SP 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 SP 600 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 Small has no effect on the direction of SPDR SP i.e., SPDR SP and Vanguard go up and down completely randomly.

Pair Corralation between SPDR SP and Vanguard

Given the investment horizon of 90 days SPDR SP is expected to generate 1.01 times less return on investment than Vanguard. But when comparing it to its historical volatility, SPDR SP 600 is 1.03 times less risky than Vanguard. It trades about 0.15 of its potential returns per unit of risk. Vanguard SP Small Cap is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  11,477  in Vanguard SP Small Cap on September 2, 2024 and sell it today you would earn a total of  1,384  from holding Vanguard SP Small Cap or generate 12.06% return on investment over 90 days.

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

SPDR SP 600  vs.  Vanguard SP Small Cap

SPDR SP 600

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 600 are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal basic indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard SP Small

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP Small Cap are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal basic indicators, Vanguard may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with SPDR SP and Vanguard

The main advantage of trading using opposite SPDR SP and Vanguard positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if SPDR SP 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 SPDR SP 600 and Vanguard SP Small Cap 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.