Correlation Between Vanguard Small and First Trust

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

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

Diversification Opportunities for Vanguard Small and First Trust

0.93

Correlation Coefficient

Vanguard Small  First Trust

Almost no diversification

The 3 months correlation between Vanguard and First is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and First Trust Active in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Active and Vanguard Small 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 Vanguard Small Cap Index 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 Active has no effect on the direction of Vanguard Small i.e., Vanguard Small and First Trust go up and down completely randomly.

Pair Corralation between Vanguard Small and First Trust

Allowing for the 90-day total investment horizon Vanguard Small Cap Index is expected to generate 1.04 times more return on investment than First Trust. However, Vanguard Small is 1.04 times more volatile than First Trust Active. It trades about -0.23 of its potential returns per unit of risk. First Trust Active is currently generating about -0.3 per unit of risk. If you would invest  25,702  in Vanguard Small Cap Index on October 6, 2024 and sell it today you would lose (1,353) from holding Vanguard Small Cap Index or give up 5.26% of portfolio value over 90 days.

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

Vanguard Small Cap Index  vs.  First Trust Active

Vanguard Small Cap

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental drivers, Vanguard Small is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

First Trust Active

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Active are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. 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 Vanguard Small and First Trust

The main advantage of trading using opposite Vanguard Small and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Small 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 Vanguard Small Cap Index and First Trust Active 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.