Correlation Between Vanguard and IShares MSCI

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

Diversification Opportunities for Vanguard and IShares MSCI

-0.44

Correlation Coefficient

Vanguard  IShares MSCI

Very good diversification

The 3 months correlation between Vanguard and IShares is -0.44. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard SP Small Cap and iShares MSCI EAFE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares MSCI EAFE 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 IShares MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares MSCI EAFE has no effect on the direction of Vanguard i.e., Vanguard and IShares MSCI go up and down completely randomly.

Pair Corralation between Vanguard and IShares MSCI

Given the investment horizon of 90 days Vanguard SP Small Cap is expected to generate 1.49 times more return on investment than IShares MSCI. However, Vanguard is 1.49 times more volatile than iShares MSCI EAFE. It trades about 0.15 of its potential returns per unit of risk. iShares MSCI EAFE is currently generating about -0.02 per unit of risk. If you would invest  11,477  in Vanguard SP Small Cap on September 2, 2024 and sell it today you would earn a total of  1,384  from holding Vanguard SP Small Cap or generate 12.06% return on investment over 90 days.

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

Vanguard SP Small Cap  vs.  iShares MSCI EAFE

Vanguard SP Small

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP Small Cap are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal basic indicators, Vanguard may actually be approaching a critical reversion point that can send shares even higher in January 2025.

iShares MSCI EAFE

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares MSCI EAFE has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, IShares MSCI is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard and IShares MSCI

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

The idea behind Vanguard SP Small Cap and iShares MSCI EAFE 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.