Correlation Between SPDR SP and Vanguard Materials

Can any of the company-specific risk be diversified away by investing in both SPDR SP and Vanguard Materials 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 SPDR SP and Vanguard Materials into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between SPDR SP Metals and Vanguard Materials Index, you can compare the effects of market volatilities on SPDR SP and Vanguard Materials 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 SPDR SP with a short position of Vanguard Materials. Check out your portfolio center. Please also check ongoing floating volatility patterns of SPDR SP and Vanguard Materials.

Diversification Opportunities for SPDR SP and Vanguard Materials

0.71

Correlation Coefficient

SPDR SP  Vanguard Materials

Poor diversification

The 3 months correlation between SPDR and Vanguard is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP Metals and Vanguard Materials Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Materials Index and SPDR SP 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 SPDR SP Metals are associated (or correlated) with Vanguard Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Materials Index has no effect on the direction of SPDR SP i.e., SPDR SP and Vanguard Materials go up and down completely randomly.

Pair Corralation between SPDR SP and Vanguard Materials

Considering the 90-day investment horizon SPDR SP Metals is expected to under-perform the Vanguard Materials. In addition to that, SPDR SP is 1.34 times more volatile than Vanguard Materials Index. It trades about -0.74 of its total potential returns per unit of risk. Vanguard Materials Index is currently generating about -0.53 per unit of volatility. If you would invest  20,978  in Vanguard Materials Index on September 23, 2024 and sell it today you would lose (1,995) from holding Vanguard Materials Index or give up 9.51% of portfolio value over 90 days.

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

SPDR SP Metals  vs.  Vanguard Materials Index

SPDR SP Metals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days SPDR SP Metals has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, SPDR SP is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Vanguard Materials Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Materials Index has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Etf's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the fund sophisticated investors.

Pair Trading with SPDR SP and Vanguard Materials

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

The idea behind SPDR SP Metals and Vanguard Materials 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.