Correlation Between Vanguard Total and IShares MSCI

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

By analyzing existing cross correlation between Vanguard Total Market and iShares MSCI EAFE, you can compare the effects of market volatilities on Vanguard Total and IShares MSCI 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 Total with a short position of IShares MSCI. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Total and IShares MSCI.

Diversification Opportunities for Vanguard Total and IShares MSCI

0.16

Correlation Coefficient

Vanguard Total  IShares MSCI

Average diversification

The 3 months correlation between Vanguard and IShares is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Total Market and iShares MSCI EAFE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares MSCI EAFE and Vanguard Total 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 Total Market are associated (or correlated) with IShares MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares MSCI EAFE has no effect on the direction of Vanguard Total i.e., Vanguard Total and IShares MSCI go up and down completely randomly.

Pair Corralation between Vanguard Total and IShares MSCI

Assuming the 90 days trading horizon Vanguard Total Market is expected to generate 1.09 times more return on investment than IShares MSCI. However, Vanguard Total is 1.09 times more volatile than iShares MSCI EAFE. It trades about 0.28 of its potential returns per unit of risk. iShares MSCI EAFE is currently generating about 0.01 per unit of risk. If you would invest  10,038  in Vanguard Total Market on September 1, 2024 and sell it today you would earn a total of  1,401  from holding Vanguard Total Market or generate 13.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Vanguard Total Market  vs.  iShares MSCI EAFE

Vanguard Total Market

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Total Market are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Vanguard Total displayed solid returns over the last few months and may actually be approaching a breakup point.

iShares MSCI EAFE

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares MSCI EAFE has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, IShares MSCI 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 Total and IShares MSCI

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

The idea behind Vanguard Total Market and iShares MSCI EAFE 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.