Correlation Between Vanguard Utilities and Vanguard Financials

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

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

Diversification Opportunities for Vanguard Utilities and Vanguard Financials

0.73

Correlation Coefficient

Vanguard Utilities  Vanguard Financials

Poor diversification

The 3 months correlation between Vanguard and Vanguard is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Utilities Index and Vanguard Financials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Financials Index and Vanguard Utilities 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 Utilities Index are associated (or correlated) with Vanguard Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Financials Index has no effect on the direction of Vanguard Utilities i.e., Vanguard Utilities and Vanguard Financials go up and down completely randomly.

Pair Corralation between Vanguard Utilities and Vanguard Financials

Assuming the 90 days horizon Vanguard Utilities Index is expected to under-perform the Vanguard Financials. In addition to that, Vanguard Utilities is 1.05 times more volatile than Vanguard Financials Index. It trades about -0.04 of its total potential returns per unit of risk. Vanguard Financials Index is currently generating about -0.03 per unit of volatility. If you would invest  6,283  in Vanguard Financials Index on November 29, 2024 and sell it today you would lose (113.00) from holding Vanguard Financials Index or give up 1.8% of portfolio value over 90 days.

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

Vanguard Utilities Index  vs.  Vanguard Financials Index

Vanguard Utilities Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Utilities Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Vanguard Utilities is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Financials Index

Risk-Adjusted Performance

Very Weak

Over the last 90 days Vanguard Financials Index has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong forward indicators, Vanguard Financials is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Vanguard Utilities and Vanguard Financials

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

The idea behind Vanguard Utilities Index and Vanguard Financials Index 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.