Correlation Between IShares TIPS and First Trust

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

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

Diversification Opportunities for IShares TIPS and First Trust

0.7

Correlation Coefficient

IShares TIPS  First Trust

Poor diversification

The 3 months correlation between IShares and First is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding iShares TIPS Bond and First Trust Tactical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Tactical and IShares TIPS 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 iShares TIPS Bond 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 Tactical has no effect on the direction of IShares TIPS i.e., IShares TIPS and First Trust go up and down completely randomly.

Pair Corralation between IShares TIPS and First Trust

Considering the 90-day investment horizon iShares TIPS Bond is expected to generate 1.21 times more return on investment than First Trust. However, IShares TIPS is 1.21 times more volatile than First Trust Tactical. It trades about 0.2 of its potential returns per unit of risk. First Trust Tactical is currently generating about 0.06 per unit of risk. If you would invest  10,668  in iShares TIPS Bond on December 28, 2024 and sell it today you would earn a total of  341.00  from holding iShares TIPS Bond or generate 3.2% return on investment over 90 days.

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

iShares TIPS Bond  vs.  First Trust Tactical

iShares TIPS Bond

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares TIPS Bond are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable forward indicators, IShares TIPS is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

First Trust Tactical

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Tactical are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable essential indicators, First Trust is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with IShares TIPS and First Trust

The main advantage of trading using opposite IShares TIPS and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares TIPS 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 iShares TIPS Bond and First Trust Tactical 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.