Correlation Between Industrial Select and IShares Technology

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

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

Diversification Opportunities for Industrial Select and IShares Technology

0.46

Correlation Coefficient

Industrial Select  IShares Technology

Very weak diversification

The 3 months correlation between Industrial and IShares is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and iShares Technology ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Technology ETF and Industrial 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 Industrial Select Sector are associated (or correlated) with IShares Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Technology ETF has no effect on the direction of Industrial Select i.e., Industrial Select and IShares Technology go up and down completely randomly.

Pair Corralation between Industrial Select and IShares Technology

Considering the 90-day investment horizon Industrial Select Sector is expected to under-perform the IShares Technology. But the etf apears to be less risky and, when comparing its historical volatility, Industrial Select Sector is 1.29 times less risky than IShares Technology. The etf trades about -0.01 of its potential returns per unit of risk. The iShares Technology ETF is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  15,067  in iShares Technology ETF on September 25, 2024 and sell it today you would earn a total of  1,135  from holding iShares Technology ETF or generate 7.53% return on investment over 90 days.

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

Industrial Select Sector  vs.  iShares Technology ETF

Industrial Select Sector

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Industrial Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Industrial Select is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

iShares Technology ETF

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Technology ETF are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of fairly conflicting basic indicators, IShares Technology may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Industrial Select and IShares Technology

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

The idea behind Industrial Select Sector and iShares Technology ETF 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.