Correlation Between IShares MSCI and Vanguard

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

By analyzing existing cross correlation between iShares MSCI USA and Vanguard SP 500, you can compare the effects of market volatilities on IShares MSCI and Vanguard 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 MSCI with a short position of Vanguard. Check out your portfolio center. Please also check ongoing floating volatility patterns of IShares MSCI and Vanguard.

Diversification Opportunities for IShares MSCI and Vanguard

0.97

Correlation Coefficient

IShares MSCI  Vanguard

Almost no diversification

The 3 months correlation between IShares and Vanguard is 0.97. Overlapping area represents the amount of risk that can be diversified away by holding iShares MSCI USA and Vanguard SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard SP 500 and IShares MSCI 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 MSCI USA are associated (or correlated) with Vanguard. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard SP 500 has no effect on the direction of IShares MSCI i.e., IShares MSCI and Vanguard go up and down completely randomly.

Pair Corralation between IShares MSCI and Vanguard

Given the investment horizon of 90 days IShares MSCI is expected to generate 1.48 times less return on investment than Vanguard. But when comparing it to its historical volatility, iShares MSCI USA is 1.04 times less risky than Vanguard. It trades about 0.14 of its potential returns per unit of risk. Vanguard SP 500 is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  51,497  in Vanguard SP 500 on September 13, 2024 and sell it today you would earn a total of  4,356  from holding Vanguard SP 500 or generate 8.46% return on investment over 90 days.

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

iShares MSCI USA  vs.  Vanguard SP 500

iShares MSCI USA

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI USA are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, IShares MSCI is not utilizing all of its potentials. The recent stock price mess, may contribute to short-term losses for the institutional investors.

Vanguard SP 500

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard SP 500 are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent basic indicators, Vanguard may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with IShares MSCI and Vanguard

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

The idea behind iShares MSCI USA and Vanguard SP 500 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.