Correlation Between Select Sector and SPDR Index

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

Diversification Opportunities for Select Sector and SPDR Index

-0.12

Correlation Coefficient

Select Sector  SPDR Index

Good diversification

The 3 months correlation between Select and SPDR is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding The Select Sector and SPDR Index Shares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SPDR Index Shares 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 SPDR Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SPDR Index Shares has no effect on the direction of Select Sector i.e., Select Sector and SPDR Index go up and down completely randomly.

Pair Corralation between Select Sector and SPDR Index

Assuming the 90 days trading horizon The Select Sector is expected to generate 1.41 times more return on investment than SPDR Index. However, Select Sector is 1.41 times more volatile than SPDR Index Shares. It trades about 0.11 of its potential returns per unit of risk. SPDR Index Shares is currently generating about -0.05 per unit of risk. If you would invest  148,888  in The Select Sector on September 1, 2024 and sell it today you would earn a total of  21,712  from holding The Select Sector or generate 14.58% return on investment over 90 days.

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

The Select Sector  vs.  SPDR Index Shares

Select Sector

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Select Sector showed solid returns over the last few months and may actually be approaching a breakup point.

SPDR Index Shares

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days SPDR Index Shares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, SPDR Index is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Select Sector and SPDR Index

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

The idea behind The Select Sector and SPDR Index Shares 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.