Correlation Between Industrial Select and IShares Industrials

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

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

Diversification Opportunities for Industrial Select and IShares Industrials

0.87

Correlation Coefficient

Industrial Select  IShares Industrials

Very poor diversification

The 3 months correlation between Industrial and IShares is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and iShares Industrials ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Industrials ETF and Industrial 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 Industrial Select Sector are associated (or correlated) with IShares Industrials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Industrials ETF has no effect on the direction of Industrial Select i.e., Industrial Select and IShares Industrials go up and down completely randomly.

Pair Corralation between Industrial Select and IShares Industrials

Considering the 90-day investment horizon Industrial Select Sector is expected to generate 0.97 times more return on investment than IShares Industrials. However, Industrial Select Sector is 1.03 times less risky than IShares Industrials. It trades about -0.01 of its potential returns per unit of risk. iShares Industrials ETF is currently generating about -0.05 per unit of risk. If you would invest  13,152  in Industrial Select Sector on December 29, 2024 and sell it today you would lose (137.00) from holding Industrial Select Sector or give up 1.04% of portfolio value over 90 days.

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

Industrial Select Sector  vs.  iShares Industrials ETF

Industrial Select Sector

Risk-Adjusted Performance

Very Weak

Over the last 90 days Industrial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Industrial Select is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

iShares Industrials ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Industrials ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively steady basic indicators, IShares Industrials is not utilizing all of its potentials. The latest stock price chaos, may contribute to medium-term losses for the stakeholders.

Pair Trading with Industrial Select and IShares Industrials

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

The idea behind Industrial Select Sector and iShares Industrials ETF 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.