Correlation Between Vanguard Index and Select Sector

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

By analyzing existing cross correlation between Vanguard Index Funds and The Select Sector, you can compare the effects of market volatilities on Vanguard Index and Select Sector 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 Vanguard Index with a short position of Select Sector. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Index and Select Sector.

Diversification Opportunities for Vanguard Index and Select Sector

0.77

Correlation Coefficient

Vanguard Index  Select Sector

Poor diversification

The 3 months correlation between Vanguard and Select is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Index Funds and The Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Select Sector and Vanguard Index 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 Vanguard Index Funds are associated (or correlated) with Select Sector. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Select Sector has no effect on the direction of Vanguard Index i.e., Vanguard Index and Select Sector go up and down completely randomly.

Pair Corralation between Vanguard Index and Select Sector

Assuming the 90 days trading horizon Vanguard Index is expected to generate 1.99 times less return on investment than Select Sector. But when comparing it to its historical volatility, Vanguard Index Funds is 1.55 times less risky than Select Sector. It trades about 0.2 of its potential returns per unit of risk. The Select Sector is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  370,127  in The Select Sector on September 12, 2024 and sell it today you would earn a total of  104,373  from holding The Select Sector or generate 28.2% return on investment over 90 days.

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

Vanguard Index Funds  vs.  The Select Sector

Vanguard Index Funds

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Index Funds are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating forward indicators, Vanguard Index showed solid returns over the last few months and may actually be approaching a breakup point.

Select Sector

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in The Select Sector are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Select Sector showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Vanguard Index and Select Sector

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

The idea behind Vanguard Index Funds and The 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.