Correlation Between Industrial Select and First Trust

Can any of the company-specific risk be diversified away by investing in both Industrial Select and First Trust 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 First Trust 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 First Trust Exchange Traded, you can compare the effects of market volatilities on Industrial Select and First Trust 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 First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Industrial Select and First Trust.

Diversification Opportunities for Industrial Select and First Trust

0.98

Correlation Coefficient

Industrial Select  First Trust

Almost no diversification

The 3 months correlation between Industrial and First is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Industrial Select Sector and First Trust Exchange Traded in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Exchange 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 First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Exchange has no effect on the direction of Industrial Select i.e., Industrial Select and First Trust go up and down completely randomly.

Pair Corralation between Industrial Select and First Trust

Considering the 90-day investment horizon Industrial Select is expected to generate 1.29 times less return on investment than First Trust. In addition to that, Industrial Select is 1.2 times more volatile than First Trust Exchange Traded. It trades about 0.2 of its total potential returns per unit of risk. First Trust Exchange Traded is currently generating about 0.31 per unit of volatility. If you would invest  6,338  in First Trust Exchange Traded on September 3, 2024 and sell it today you would earn a total of  972.00  from holding First Trust Exchange Traded or generate 15.34% return on investment over 90 days.

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

Industrial Select Sector  vs.  First Trust Exchange Traded

Industrial Select Sector

Risk-Adjusted Performance

15 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial Select Sector are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak essential indicators, Industrial Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Trust Exchange

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Exchange Traded are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent essential indicators, First Trust exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Industrial Select and First Trust

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

The idea behind Industrial Select Sector and First Trust Exchange Traded 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 Anywhere module to track or share privately all of your investments from the convenience of any device.