Correlation Between SPDR SP and Select Sector

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

Diversification Opportunities for SPDR SP and Select Sector

0.0

Correlation Coefficient

SPDR SP  Select Sector

Pay attention - limited upside

The 3 months correlation between SPDR and Select is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 and The Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Sector 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 Select Sector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Sector has no effect on the direction of SPDR SP i.e., SPDR SP and Select Sector go up and down completely randomly.

Pair Corralation between SPDR SP and Select Sector

Assuming the 90 days trading horizon SPDR SP 500 is expected to generate 0.93 times more return on investment than Select Sector. However, SPDR SP 500 is 1.08 times less risky than Select Sector. It trades about 0.11 of its potential returns per unit of risk. The Select Sector is currently generating about -0.06 per unit of risk. If you would invest  1,161,940  in SPDR SP 500 on October 20, 2024 and sell it today you would earn a total of  81,085  from holding SPDR SP 500 or generate 6.98% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

SPDR SP 500  vs.  The Select Sector

SPDR SP 500

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 500 are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Select Sector

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with SPDR SP and Select Sector

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

The idea behind SPDR SP 500 and The Select Sector 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.