Correlation Between Vanguard and First Trust

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

By analyzing existing cross correlation between Vanguard SP 500 and First Trust NASDAQ 100, you can compare the effects of market volatilities on Vanguard and First Trust 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 First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard and First Trust.

Diversification Opportunities for Vanguard and First Trust

0.96

Correlation Coefficient

Vanguard  First Trust

Almost no diversification

The 3 months correlation between Vanguard and First is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard SP 500 and First Trust NASDAQ 100 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust NASDAQ 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 500 are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust NASDAQ has no effect on the direction of Vanguard i.e., Vanguard and First Trust go up and down completely randomly.

Pair Corralation between Vanguard and First Trust

Considering the 90-day investment horizon Vanguard SP 500 is expected to generate 0.7 times more return on investment than First Trust. However, Vanguard SP 500 is 1.43 times less risky than First Trust. It trades about 0.33 of its potential returns per unit of risk. First Trust NASDAQ 100 is currently generating about 0.16 per unit of risk. If you would invest  54,073  in Vanguard SP 500 on September 19, 2024 and sell it today you would earn a total of  1,472  from holding Vanguard SP 500 or generate 2.72% 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 500  vs.  First Trust NASDAQ 100

Vanguard SP 500

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Vanguard is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

First Trust NASDAQ

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust NASDAQ 100 are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, First Trust is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Vanguard and First Trust

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

The idea behind Vanguard SP 500 and First Trust NASDAQ 100 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.