Correlation Between Financial Select and MicroSectors FANG

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

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

Diversification Opportunities for Financial Select and MicroSectors FANG

0.74

Correlation Coefficient

Financial Select  MicroSectors FANG

Poor diversification

The 3 months correlation between Financial and MicroSectors is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and MicroSectors FANG ETN in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MicroSectors FANG ETN and Financial Select 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 Financial Select Sector are associated (or correlated) with MicroSectors FANG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MicroSectors FANG ETN has no effect on the direction of Financial Select i.e., Financial Select and MicroSectors FANG go up and down completely randomly.

Pair Corralation between Financial Select and MicroSectors FANG

Considering the 90-day investment horizon Financial Select is expected to generate 1.49 times less return on investment than MicroSectors FANG. But when comparing it to its historical volatility, Financial Select Sector is 1.79 times less risky than MicroSectors FANG. It trades about 0.15 of its potential returns per unit of risk. MicroSectors FANG ETN is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  3,597  in MicroSectors FANG ETN on September 23, 2024 and sell it today you would earn a total of  2,223  from holding MicroSectors FANG ETN or generate 61.8% return on investment over 90 days.

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

Financial Select Sector  vs.  MicroSectors FANG ETN

Financial Select Sector

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Financial Select Sector are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady essential indicators, Financial Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

MicroSectors FANG ETN

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG ETN are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, MicroSectors FANG unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Financial Select and MicroSectors FANG

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

The idea behind Financial Select Sector and MicroSectors FANG ETN 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.