Correlation Between First Trust and Industrial Select

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

By analyzing existing cross correlation between First Trust Exchange Traded and Industrial Select Sector, you can compare the effects of market volatilities on First Trust and Industrial Select 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 Industrial Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Industrial Select.

Diversification Opportunities for First Trust and Industrial Select

0.97

Correlation Coefficient

First Trust  Industrial Select

Almost no diversification

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

Pair Corralation between First Trust and Industrial Select

Given the investment horizon of 90 days First Trust Exchange Traded is expected to generate 0.87 times more return on investment than Industrial Select. However, First Trust Exchange Traded is 1.15 times less risky than Industrial Select. It trades about 0.19 of its potential returns per unit of risk. Industrial Select Sector is currently generating about 0.14 per unit of risk. If you would invest  6,402  in First Trust Exchange Traded on September 12, 2024 and sell it today you would earn a total of  616.00  from holding First Trust Exchange Traded or generate 9.62% 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 Exchange Traded  vs.  Industrial Select Sector

First Trust Exchange

Risk-Adjusted Performance

15 of 100

Solid

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

Industrial Select Sector

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial Select Sector are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite fairly inconsistent essential indicators, Industrial Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with First Trust and Industrial Select

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

The idea behind First Trust Exchange Traded and Industrial Select Sector 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.