Correlation Between Tidal Trust and SOFR

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

By analyzing existing cross correlation between Tidal Trust II and SOFR, you can compare the effects of market volatilities on Tidal Trust and SOFR 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 Tidal Trust with a short position of SOFR. Check out your portfolio center. Please also check ongoing floating volatility patterns of Tidal Trust and SOFR.

Diversification Opportunities for Tidal Trust and SOFR

-0.41

Correlation Coefficient

Tidal Trust  SOFR

Very good diversification

The 3 months correlation between Tidal and SOFR is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Tidal Trust II and SOFR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SOFR and Tidal Trust 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 Tidal Trust II are associated (or correlated) with SOFR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SOFR has no effect on the direction of Tidal Trust i.e., Tidal Trust and SOFR go up and down completely randomly.

Pair Corralation between Tidal Trust and SOFR

Given the investment horizon of 90 days Tidal Trust II is expected to under-perform the SOFR. In addition to that, Tidal Trust is 40.92 times more volatile than SOFR. It trades about -0.03 of its total potential returns per unit of risk. SOFR is currently generating about 0.42 per unit of volatility. If you would invest  10,007  in SOFR on September 22, 2024 and sell it today you would earn a total of  43.00  from holding SOFR or generate 0.43% return on investment over 90 days.

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

Tidal Trust II  vs.  SOFR

Tidal Trust II

Risk-Adjusted Performance

0 of 100

Very Weak

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

SOFR

Risk-Adjusted Performance

38 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in SOFR are ranked lower than 38 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable technical and fundamental indicators, SOFR is not utilizing all of its potentials. The recent stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Tidal Trust and SOFR

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

The idea behind Tidal Trust II and SOFR 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.