Correlation Between Vanguard Index and Vanguard World

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

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

Diversification Opportunities for Vanguard Index and Vanguard World

0.95

Correlation Coefficient

Vanguard Index  Vanguard World

Almost no diversification

The 3 months correlation between Vanguard and Vanguard is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Index Funds and Vanguard World in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard World and Vanguard Index 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 Index Funds are associated (or correlated) with Vanguard World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard World has no effect on the direction of Vanguard Index i.e., Vanguard Index and Vanguard World go up and down completely randomly.

Pair Corralation between Vanguard Index and Vanguard World

Assuming the 90 days trading horizon Vanguard Index Funds is expected to under-perform the Vanguard World. But the etf apears to be less risky and, when comparing its historical volatility, Vanguard Index Funds is 1.89 times less risky than Vanguard World. The etf trades about -0.18 of its potential returns per unit of risk. The Vanguard World is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,278,459  in Vanguard World on October 1, 2024 and sell it today you would earn a total of  5,741  from holding Vanguard World or generate 0.45% return on investment over 90 days.

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

Vanguard Index Funds  vs.  Vanguard World

Vanguard Index Funds

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Index Funds are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward indicators, Vanguard Index may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard World

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard World are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Vanguard World showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Index and Vanguard World

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

The idea behind Vanguard Index Funds and Vanguard World 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.