Correlation Between SPDR SP and Vanguard World

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

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

Diversification Opportunities for SPDR SP and Vanguard World

0.85

Correlation Coefficient

SPDR SP  Vanguard World

Very poor diversification

The 3 months correlation between SPDR and Vanguard is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding SPDR SP 500 and Vanguard World in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard World and SPDR 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 SPDR SP 500 are associated (or correlated) with Vanguard World. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard World has no effect on the direction of SPDR SP i.e., SPDR SP and Vanguard World go up and down completely randomly.

Pair Corralation between SPDR SP and Vanguard World

Assuming the 90 days trading horizon SPDR SP is expected to generate 2.6 times less return on investment than Vanguard World. But when comparing it to its historical volatility, SPDR SP 500 is 1.61 times less risky than Vanguard World. It trades about 0.11 of its potential returns per unit of risk. Vanguard World is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  658,921  in Vanguard World on September 30, 2024 and sell it today you would earn a total of  128,079  from holding Vanguard World or generate 19.44% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

SPDR SP 500  vs.  Vanguard World

SPDR SP 500

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in SPDR SP 500 are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, SPDR SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Vanguard World

Risk-Adjusted Performance

14 of 100

Good

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

Pair Trading with SPDR SP and Vanguard World

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

The idea behind SPDR SP 500 and Vanguard World 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.

Check out your portfolio center.

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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.