Correlation Between Vanguard Small and WisdomTree SmallCap

Can any of the company-specific risk be diversified away by investing in both Vanguard Small and WisdomTree SmallCap 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 WisdomTree SmallCap 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 WisdomTree SmallCap Dividend, you can compare the effects of market volatilities on Vanguard Small and WisdomTree SmallCap 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 WisdomTree SmallCap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and WisdomTree SmallCap.

Diversification Opportunities for Vanguard Small and WisdomTree SmallCap

0.99

Correlation Coefficient

Vanguard Small  WisdomTree SmallCap

No risk reduction

The 3 months correlation between Vanguard and WisdomTree is 0.99. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Value and WisdomTree SmallCap Dividend in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree SmallCap 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 WisdomTree SmallCap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree SmallCap has no effect on the direction of Vanguard Small i.e., Vanguard Small and WisdomTree SmallCap go up and down completely randomly.

Pair Corralation between Vanguard Small and WisdomTree SmallCap

Considering the 90-day investment horizon Vanguard Small is expected to generate 1.01 times less return on investment than WisdomTree SmallCap. But when comparing it to its historical volatility, Vanguard Small Cap Value is 1.31 times less risky than WisdomTree SmallCap. It trades about 0.19 of its potential returns per unit of risk. WisdomTree SmallCap Dividend is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  3,337  in WisdomTree SmallCap Dividend on September 1, 2024 and sell it today you would earn a total of  392.00  from holding WisdomTree SmallCap Dividend or generate 11.75% return on investment over 90 days.

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

Vanguard Small Cap Value  vs.  WisdomTree SmallCap Dividend

Vanguard Small Cap

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Value are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady fundamental drivers, Vanguard Small may actually be approaching a critical reversion point that can send shares even higher in December 2024.

WisdomTree SmallCap

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in WisdomTree SmallCap Dividend are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating technical and fundamental indicators, WisdomTree SmallCap may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Vanguard Small and WisdomTree SmallCap

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

The idea behind Vanguard Small Cap Value and WisdomTree SmallCap Dividend 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.