Correlation Between IShares ESG and First Trust

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

By analyzing existing cross correlation between iShares ESG Aggregate and First Trust Low, you can compare the effects of market volatilities on IShares ESG and First Trust 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 IShares ESG with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares ESG and First Trust.

Diversification Opportunities for IShares ESG and First Trust

0.86

Correlation Coefficient

IShares ESG  First Trust

Very poor diversification

The 3 months correlation between IShares and First is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding iShares ESG Aggregate and First Trust Low in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Low and IShares ESG 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 iShares ESG Aggregate are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Low has no effect on the direction of IShares ESG i.e., IShares ESG and First Trust go up and down completely randomly.

Pair Corralation between IShares ESG and First Trust

Given the investment horizon of 90 days iShares ESG Aggregate is expected to under-perform the First Trust. In addition to that, IShares ESG is 1.85 times more volatile than First Trust Low. It trades about -0.16 of its total potential returns per unit of risk. First Trust Low is currently generating about -0.08 per unit of volatility. If you would invest  1,892  in First Trust Low on September 26, 2024 and sell it today you would lose (16.46) from holding First Trust Low or give up 0.87% of portfolio value over 90 days.

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

iShares ESG Aggregate  vs.  First Trust Low

iShares ESG Aggregate

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares ESG Aggregate has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical and fundamental indicators, IShares ESG is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

First Trust Low

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Trust Low has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, First Trust is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with IShares ESG and First Trust

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

The idea behind iShares ESG Aggregate and First Trust Low 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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.