Correlation Between Vanguard and SPDR SP

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

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

Diversification Opportunities for Vanguard and SPDR SP

0.97

Correlation Coefficient

Vanguard  SPDR SP

Almost no diversification

The 3 months correlation between Vanguard and SPDR is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard SP Small Cap and SPDR SP MIDCAP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR SP MIDCAP and Vanguard 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 SP Small Cap are associated (or correlated) with SPDR SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR SP MIDCAP has no effect on the direction of Vanguard i.e., Vanguard and SPDR SP go up and down completely randomly.

Pair Corralation between Vanguard and SPDR SP

Given the investment horizon of 90 days Vanguard is expected to generate 1.16 times less return on investment than SPDR SP. In addition to that, Vanguard is 1.37 times more volatile than SPDR SP MIDCAP. It trades about 0.08 of its total potential returns per unit of risk. SPDR SP MIDCAP is currently generating about 0.13 per unit of volatility. If you would invest  55,763  in SPDR SP MIDCAP on September 16, 2024 and sell it today you would earn a total of  4,202  from holding SPDR SP MIDCAP or generate 7.54% return on investment over 90 days.

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

Vanguard SP Small Cap  vs.  SPDR SP MIDCAP

Vanguard SP Small

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP Small Cap are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Vanguard is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

SPDR SP MIDCAP

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP MIDCAP are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak fundamental indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Vanguard and SPDR SP

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

The idea behind Vanguard SP Small Cap and SPDR SP MIDCAP 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.