Correlation Between Select Sector and Direxion Shares

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

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

Diversification Opportunities for Select Sector and Direxion Shares

0.9

Correlation Coefficient

Select Sector  Direxion Shares

Almost no diversification

The 3 months correlation between Select and Direxion is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and Direxion Shares ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direxion Shares ETF and Select Sector 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 The Select Sector are associated (or correlated) with Direxion Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direxion Shares ETF has no effect on the direction of Select Sector i.e., Select Sector and Direxion Shares go up and down completely randomly.

Pair Corralation between Select Sector and Direxion Shares

Assuming the 90 days trading horizon Select Sector is expected to generate 2.94 times less return on investment than Direxion Shares. But when comparing it to its historical volatility, The Select Sector is 2.42 times less risky than Direxion Shares. It trades about 0.14 of its potential returns per unit of risk. Direxion Shares ETF is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  236,632  in Direxion Shares ETF on September 13, 2024 and sell it today you would earn a total of  95,768  from holding Direxion Shares ETF or generate 40.47% return on investment over 90 days.

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

The Select Sector  vs.  Direxion Shares ETF

Select Sector

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward-looking signals, Select Sector showed solid returns over the last few months and may actually be approaching a breakup point.

Direxion Shares ETF

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Direxion Shares ETF are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Direxion Shares showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Select Sector and Direxion Shares

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

The idea behind The Select Sector and Direxion Shares 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 Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.