Correlation Between SPDR SP and IShares Small

Can any of the company-specific risk be diversified away by investing in both SPDR SP and IShares Small 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 IShares Small 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 iShares Small Cap, you can compare the effects of market volatilities on SPDR SP and IShares Small 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 IShares Small. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and IShares Small.

Diversification Opportunities for SPDR SP and IShares Small

0.99

Correlation Coefficient

SPDR SP  IShares Small

No risk reduction

The 3 months correlation between SPDR and IShares is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 600 and iShares Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Small Cap 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 IShares Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Small Cap has no effect on the direction of SPDR SP i.e., SPDR SP and IShares Small go up and down completely randomly.

Pair Corralation between SPDR SP and IShares Small

Given the investment horizon of 90 days SPDR SP is expected to generate 1.24 times less return on investment than IShares Small. But when comparing it to its historical volatility, SPDR SP 600 is 1.35 times less risky than IShares Small. It trades about 0.25 of its potential returns per unit of risk. iShares Small Cap is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  3,188  in iShares Small Cap on September 5, 2024 and sell it today you would earn a total of  358.00  from holding iShares Small Cap or generate 11.23% 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.  iShares 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. In spite of fairly fragile basic indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

iShares Small Cap

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Small Cap are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, IShares Small disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with SPDR SP and IShares Small

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

The idea behind SPDR SP 600 and iShares 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.