Correlation Between IShares Europe and First Trust

Can any of the company-specific risk be diversified away by investing in both IShares Europe 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 Europe 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 Europe ETF and First Trust STOXX, you can compare the effects of market volatilities on IShares Europe 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 Europe with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares Europe and First Trust.

Diversification Opportunities for IShares Europe and First Trust

0.97

Correlation Coefficient

IShares Europe  First Trust

Almost no diversification

The 3 months correlation between IShares and First is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding iShares Europe ETF and First Trust STOXX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust STOXX and IShares Europe 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 Europe ETF 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 STOXX has no effect on the direction of IShares Europe i.e., IShares Europe and First Trust go up and down completely randomly.

Pair Corralation between IShares Europe and First Trust

Considering the 90-day investment horizon iShares Europe ETF is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, iShares Europe ETF is 1.09 times less risky than First Trust. The etf trades about -0.1 of its potential returns per unit of risk. The First Trust STOXX is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  1,216  in First Trust STOXX on September 3, 2024 and sell it today you would lose (46.00) from holding First Trust STOXX or give up 3.78% of portfolio value over 90 days.

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

iShares Europe ETF  vs.  First Trust STOXX

iShares Europe ETF

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares Europe ETF has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable technical and fundamental indicators, IShares Europe is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

First Trust STOXX

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with IShares Europe and First Trust

The main advantage of trading using opposite IShares Europe and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if IShares Europe 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 Europe ETF and First Trust STOXX 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.