Correlation Between Energy Select and IShares Oil

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

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

Diversification Opportunities for Energy Select and IShares Oil

0.98

Correlation Coefficient

Energy Select  IShares Oil

Almost no diversification

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

Pair Corralation between Energy Select and IShares Oil

Considering the 90-day investment horizon Energy Select is expected to generate 1.21 times less return on investment than IShares Oil. But when comparing it to its historical volatility, Energy Select Sector is 1.09 times less risky than IShares Oil. It trades about 0.89 of its potential returns per unit of risk. iShares Oil Gas is currently generating about 0.99 of returns per unit of risk over similar time horizon. If you would invest  8,648  in iShares Oil Gas on October 22, 2024 and sell it today you would earn a total of  1,264  from holding iShares Oil Gas or generate 14.62% return on investment over 90 days.

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

Energy Select Sector  vs.  iShares Oil Gas

Energy Select Sector

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound essential indicators, Energy Select is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

iShares Oil Gas

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Oil Gas are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very weak technical and fundamental indicators, IShares Oil may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Energy Select and IShares Oil

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

The idea behind Energy Select Sector and iShares Oil Gas 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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.