Correlation Between Energy Select and Vanguard Energy

Can any of the company-specific risk be diversified away by investing in both Energy Select and Vanguard Energy 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 Vanguard Energy 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 Vanguard Energy Index, you can compare the effects of market volatilities on Energy Select and Vanguard Energy 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 Vanguard Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Energy Select and Vanguard Energy.

Diversification Opportunities for Energy Select and Vanguard Energy

0.94

Correlation Coefficient

Energy Select  Vanguard Energy

Almost no diversification

The 3 months correlation between Energy and Vanguard is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Energy Select Sector and Vanguard Energy Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Energy Index 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 Vanguard Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Energy Index has no effect on the direction of Energy Select i.e., Energy Select and Vanguard Energy go up and down completely randomly.

Pair Corralation between Energy Select and Vanguard Energy

Considering the 90-day investment horizon Energy Select is expected to generate 1.14 times less return on investment than Vanguard Energy. But when comparing it to its historical volatility, Energy Select Sector is 1.02 times less risky than Vanguard Energy. It trades about 0.09 of its potential returns per unit of risk. Vanguard Energy Index is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  11,819  in Vanguard Energy Index on September 13, 2024 and sell it today you would earn a total of  881.00  from holding Vanguard Energy Index or generate 7.45% 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.  Vanguard Energy Index

Energy Select Sector

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Energy Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard Energy Index

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Energy Index are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent fundamental indicators, Vanguard Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Energy Select and Vanguard Energy

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

The idea behind Energy Select Sector and Vanguard Energy 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.

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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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.