Correlation Between Vanguard Small and American Century

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

By analyzing existing cross correlation between Vanguard Small Cap Value and American Century ETF, you can compare the effects of market volatilities on Vanguard Small and American Century 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 American Century. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and American Century.

Diversification Opportunities for Vanguard Small and American Century

0.85

Correlation Coefficient

Vanguard Small  American Century

Very poor diversification

The 3 months correlation between Vanguard and American is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Value and American Century ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Century ETF 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 Value are associated (or correlated) with American Century. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Century ETF has no effect on the direction of Vanguard Small i.e., Vanguard Small and American Century go up and down completely randomly.

Pair Corralation between Vanguard Small and American Century

Considering the 90-day investment horizon Vanguard Small Cap Value is expected to generate 0.89 times more return on investment than American Century. However, Vanguard Small Cap Value is 1.12 times less risky than American Century. It trades about -0.08 of its potential returns per unit of risk. American Century ETF is currently generating about -0.15 per unit of risk. If you would invest  19,635  in Vanguard Small Cap Value on December 30, 2024 and sell it today you would lose (1,077) from holding Vanguard Small Cap Value or give up 5.49% of portfolio value over 90 days.

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

Vanguard Small Cap Value  vs.  American Century ETF

Vanguard Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Small Cap Value has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental drivers, Vanguard Small is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

American Century ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days American Century ETF has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Etf's basic indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the fund shareholders.

Pair Trading with Vanguard Small and American Century

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

The idea behind Vanguard Small Cap Value and American Century 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.