Correlation Between Materials Select and First Trust

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

By analyzing existing cross correlation between Materials Select Sector and First Trust Materials, you can compare the effects of market volatilities on Materials Select and First Trust 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 Materials Select with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Materials Select and First Trust.

Diversification Opportunities for Materials Select and First Trust

0.98

Correlation Coefficient

Materials Select  First Trust

Almost no diversification

The 3 months correlation between Materials and First is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Materials Select Sector and First Trust Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Materials and Materials Select 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 Materials Select Sector are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Materials has no effect on the direction of Materials Select i.e., Materials Select and First Trust go up and down completely randomly.

Pair Corralation between Materials Select and First Trust

Considering the 90-day investment horizon Materials Select Sector is expected to generate 0.79 times more return on investment than First Trust. However, Materials Select Sector is 1.27 times less risky than First Trust. It trades about -0.52 of its potential returns per unit of risk. First Trust Materials is currently generating about -0.58 per unit of risk. If you would invest  9,409  in Materials Select Sector on September 23, 2024 and sell it today you would lose (851.00) from holding Materials Select Sector or give up 9.04% of portfolio value over 90 days.

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

Materials Select Sector  vs.  First Trust Materials

Materials Select Sector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Materials Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest inconsistent performance, the Etf's essential indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the ETF investors.

First Trust Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Trust Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Etf's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the ETF investors.

Pair Trading with Materials Select and First Trust

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

The idea behind Materials Select Sector and First Trust Materials 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.