Correlation Between SPDR SP and Vanguard Industrials

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

By analyzing existing cross correlation between SPDR SP 500 and Vanguard Industrials ETF, you can compare the effects of market volatilities on SPDR SP and Vanguard Industrials 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 Industrials. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Vanguard Industrials.

Diversification Opportunities for SPDR SP and Vanguard Industrials

0.45

Correlation Coefficient

SPDR SP  Vanguard Industrials

Very weak diversification

The 3 months correlation between SPDR and Vanguard is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 and Vanguard Industrials ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Industrials ETF 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 500 are associated (or correlated) with Vanguard Industrials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Industrials ETF has no effect on the direction of SPDR SP i.e., SPDR SP and Vanguard Industrials go up and down completely randomly.

Pair Corralation between SPDR SP and Vanguard Industrials

Assuming the 90 days trading horizon SPDR SP 500 is expected to generate 0.68 times more return on investment than Vanguard Industrials. However, SPDR SP 500 is 1.46 times less risky than Vanguard Industrials. It trades about -0.03 of its potential returns per unit of risk. Vanguard Industrials ETF is currently generating about -0.05 per unit of risk. If you would invest  1,228,033  in SPDR SP 500 on December 2, 2024 and sell it today you would lose (19,789) from holding SPDR SP 500 or give up 1.61% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

SPDR SP 500  vs.  Vanguard Industrials ETF

SPDR SP 500

Risk-Adjusted Performance

Very Weak

Over the last 90 days SPDR SP 500 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, SPDR SP is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Industrials ETF

Risk-Adjusted Performance

Very Weak

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

Pair Trading with SPDR SP and Vanguard Industrials

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

The idea behind SPDR SP 500 and Vanguard Industrials 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.

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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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.