Correlation Between Vanguard Small and Schwab Small-cap

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

By analyzing existing cross correlation between Vanguard Small Cap Index and Schwab Small Cap Equity, you can compare the effects of market volatilities on Vanguard Small and Schwab Small-cap 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 Schwab Small-cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small and Schwab Small-cap.

Diversification Opportunities for Vanguard Small and Schwab Small-cap

0.86

Correlation Coefficient

Vanguard Small  Schwab Small-cap

Very poor diversification

The 3 months correlation between Vanguard and Schwab is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Small Cap Index and Schwab Small Cap Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Schwab Small Cap 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 Index are associated (or correlated) with Schwab Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Schwab Small Cap has no effect on the direction of Vanguard Small i.e., Vanguard Small and Schwab Small-cap go up and down completely randomly.

Pair Corralation between Vanguard Small and Schwab Small-cap

Assuming the 90 days horizon Vanguard Small Cap Index is expected to generate 0.51 times more return on investment than Schwab Small-cap. However, Vanguard Small Cap Index is 1.98 times less risky than Schwab Small-cap. It trades about -0.14 of its potential returns per unit of risk. Schwab Small Cap Equity is currently generating about -0.19 per unit of risk. If you would invest  35,808  in Vanguard Small Cap Index on December 2, 2024 and sell it today you would lose (2,947) from holding Vanguard Small Cap Index or give up 8.23% of portfolio value over 90 days.

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

Vanguard Small Cap Index  vs.  Schwab Small Cap Equity

Vanguard Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Small Cap Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Schwab Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Schwab Small Cap Equity has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's fundamental indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Vanguard Small and Schwab Small-cap

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

The idea behind Vanguard Small Cap Index and Schwab Small Cap Equity 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.