Correlation Between Schwab Strategic and First Trust

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

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

Diversification Opportunities for Schwab Strategic and First Trust

-0.8

Correlation Coefficient

Schwab Strategic  First Trust

Pay attention - limited upside

The 3 months correlation between Schwab and First is -0.8. Overlapping area represents the amount of risk that can be diversified away by holding Schwab Strategic Trust and First Trust Global in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Global and Schwab Strategic 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 Strategic Trust are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Global has no effect on the direction of Schwab Strategic i.e., Schwab Strategic and First Trust go up and down completely randomly.

Pair Corralation between Schwab Strategic and First Trust

Given the investment horizon of 90 days Schwab Strategic Trust is expected to generate 3.26 times more return on investment than First Trust. However, Schwab Strategic is 3.26 times more volatile than First Trust Global. It trades about 0.22 of its potential returns per unit of risk. First Trust Global is currently generating about -0.06 per unit of risk. If you would invest  3,087  in Schwab Strategic Trust on September 5, 2024 and sell it today you would earn a total of  2,133  from holding Schwab Strategic Trust or generate 69.1% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Schwab Strategic Trust  vs.  First Trust Global

Schwab Strategic Trust

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Schwab Strategic Trust are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating fundamental indicators, Schwab Strategic exhibited solid returns over the last few months and may actually be approaching a breakup point.

First Trust Global

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Trust Global has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, First Trust is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Schwab Strategic and First Trust

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

The idea behind Schwab Strategic Trust and First Trust Global 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.