Correlation Between IShares SP and Vanguard Small

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

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

Diversification Opportunities for IShares SP and Vanguard Small

0.98

Correlation Coefficient

IShares SP  Vanguard Small

Almost no diversification

The 3 months correlation between IShares and Vanguard is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding iShares SP Small Cap and Vanguard Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Small Cap and IShares 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 iShares SP Small Cap are associated (or correlated) with Vanguard Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Small Cap has no effect on the direction of IShares SP i.e., IShares SP and Vanguard Small go up and down completely randomly.

Pair Corralation between IShares SP and Vanguard Small

Considering the 90-day investment horizon iShares SP Small Cap is expected to generate 1.31 times more return on investment than Vanguard Small. However, IShares SP is 1.31 times more volatile than Vanguard Small Cap Value. It trades about 0.15 of its potential returns per unit of risk. Vanguard Small Cap Value is currently generating about 0.18 per unit of risk. If you would invest  10,430  in iShares SP Small Cap on September 2, 2024 and sell it today you would earn a total of  1,286  from holding iShares SP Small Cap or generate 12.33% return on investment over 90 days.

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

iShares SP Small Cap  vs.  Vanguard Small Cap Value

iShares SP Small

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in iShares SP Small Cap are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain forward-looking indicators, IShares SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard Small Cap

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Value are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady fundamental drivers, Vanguard Small may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares SP and Vanguard Small

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

The idea behind iShares SP Small Cap and Vanguard Small Cap Value 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.