Correlation Between Financial Select and First Trust

Can any of the company-specific risk be diversified away by investing in both Financial 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 Financial 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 Financial Select Sector and First Trust NASDAQ, you can compare the effects of market volatilities on Financial 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 Financial Select with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Select and First Trust.

Diversification Opportunities for Financial Select and First Trust

0.81

Correlation Coefficient

Financial Select  First Trust

Very poor diversification

The 3 months correlation between Financial and First is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and First Trust NASDAQ in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust NASDAQ and Financial 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 Financial 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 NASDAQ has no effect on the direction of Financial Select i.e., Financial Select and First Trust go up and down completely randomly.

Pair Corralation between Financial Select and First Trust

Considering the 90-day investment horizon Financial Select Sector is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, Financial Select Sector is 1.68 times less risky than First Trust. The etf trades about -0.2 of its potential returns per unit of risk. The First Trust NASDAQ is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  6,402  in First Trust NASDAQ on September 27, 2024 and sell it today you would earn a total of  103.00  from holding First Trust NASDAQ or generate 1.61% return on investment over 90 days.

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

Financial Select Sector  vs.  First Trust NASDAQ

Financial Select Sector

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain essential indicators, Financial Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust NASDAQ

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust NASDAQ are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting fundamental drivers, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Financial Select and First Trust

The main advantage of trading using opposite Financial Select and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial 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 Financial Select Sector and First Trust NASDAQ 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.