Correlation Between Vanguard and IShares Russell

Can any of the company-specific risk be diversified away by investing in both Vanguard and IShares Russell 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 Russell 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 Russell 2000, you can compare the effects of market volatilities on Vanguard and IShares Russell 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 Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard and IShares Russell.

Diversification Opportunities for Vanguard and IShares Russell

0.97

Correlation Coefficient

Vanguard  IShares Russell

Almost no diversification

The 3 months correlation between Vanguard and IShares is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard SP Small Cap and iShares Russell 2000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Russell 2000 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 Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Russell 2000 has no effect on the direction of Vanguard i.e., Vanguard and IShares Russell go up and down completely randomly.

Pair Corralation between Vanguard and IShares Russell

Given the investment horizon of 90 days Vanguard SP Small Cap is expected to generate 1.02 times more return on investment than IShares Russell. However, Vanguard is 1.02 times more volatile than iShares Russell 2000. It trades about -0.03 of its potential returns per unit of risk. iShares Russell 2000 is currently generating about -0.04 per unit of risk. If you would invest  9,568  in Vanguard SP Small Cap on November 19, 2024 and sell it today you would lose (207.00) from holding Vanguard SP Small Cap or give up 2.16% of portfolio value 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.  iShares Russell 2000

Vanguard SP Small

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard SP Small Cap has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Vanguard is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

iShares Russell 2000

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Russell 2000 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, IShares Russell is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Vanguard and IShares Russell

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

The idea behind Vanguard SP Small Cap and iShares Russell 2000 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.