Correlation Between SPDR MSCI and Vanguard

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

By analyzing existing cross correlation between SPDR MSCI World and Vanguard SP 500, you can compare the effects of market volatilities on SPDR MSCI and Vanguard 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 SPDR MSCI with a short position of Vanguard. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR MSCI and Vanguard.

Diversification Opportunities for SPDR MSCI and Vanguard

0.9

Correlation Coefficient

SPDR MSCI  Vanguard

Almost no diversification

The 3 months correlation between SPDR and Vanguard is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding SPDR MSCI World and Vanguard SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP 500 and SPDR MSCI 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 SPDR MSCI World are associated (or correlated) with Vanguard. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard SP 500 has no effect on the direction of SPDR MSCI i.e., SPDR MSCI and Vanguard go up and down completely randomly.

Pair Corralation between SPDR MSCI and Vanguard

Assuming the 90 days trading horizon SPDR MSCI is expected to generate 1.5 times less return on investment than Vanguard. In addition to that, SPDR MSCI is 1.29 times more volatile than Vanguard SP 500. It trades about 0.11 of its total potential returns per unit of risk. Vanguard SP 500 is currently generating about 0.21 per unit of volatility. If you would invest  9,180  in Vanguard SP 500 on September 30, 2024 and sell it today you would earn a total of  1,008  from holding Vanguard SP 500 or generate 10.98% return on investment over 90 days.

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

SPDR MSCI World  vs.  Vanguard SP 500

SPDR MSCI World

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR MSCI World are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, SPDR MSCI may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard SP 500

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Vanguard may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with SPDR MSCI and Vanguard

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

The idea behind SPDR MSCI World and Vanguard SP 500 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.