Correlation Between First Trust and IShares Financials

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

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

Diversification Opportunities for First Trust and IShares Financials

1.0

Correlation Coefficient

First Trust  IShares Financials

No risk reduction

The 3 months correlation between First and IShares is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Financials and iShares Financials ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Financials ETF and First 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 First Trust Financials are associated (or correlated) with IShares Financials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Financials ETF has no effect on the direction of First Trust i.e., First Trust and IShares Financials go up and down completely randomly.

Pair Corralation between First Trust and IShares Financials

Considering the 90-day investment horizon First Trust Financials is expected to generate 1.1 times more return on investment than IShares Financials. However, First Trust is 1.1 times more volatile than iShares Financials ETF. It trades about 0.19 of its potential returns per unit of risk. iShares Financials ETF is currently generating about 0.19 per unit of risk. If you would invest  5,053  in First Trust Financials on August 31, 2024 and sell it today you would earn a total of  840.00  from holding First Trust Financials or generate 16.62% return on investment over 90 days.

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

First Trust Financials  vs.  iShares Financials ETF

First Trust Financials

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Financials are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, First Trust displayed solid returns over the last few months and may actually be approaching a breakup point.

iShares Financials ETF

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Financials ETF are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, IShares Financials reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First Trust and IShares Financials

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

The idea behind First Trust Financials and iShares Financials 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.