Correlation Between Consumer Staples and First Trust

Can any of the company-specific risk be diversified away by investing in both Consumer Staples 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 Consumer Staples and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Consumer Staples Select and First Trust Consumer, you can compare the effects of market volatilities on Consumer Staples 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 Consumer Staples with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Consumer Staples and First Trust.

Diversification Opportunities for Consumer Staples and First Trust

0.27

Correlation Coefficient

Consumer Staples  First Trust

Modest diversification

The 3 months correlation between Consumer and First is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Consumer Staples Select and First Trust Consumer in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Consumer and Consumer Staples 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 Consumer Staples Select 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 Consumer has no effect on the direction of Consumer Staples i.e., Consumer Staples and First Trust go up and down completely randomly.

Pair Corralation between Consumer Staples and First Trust

Considering the 90-day investment horizon Consumer Staples Select is expected to under-perform the First Trust. But the etf apears to be less risky and, when comparing its historical volatility, Consumer Staples Select is 1.81 times less risky than First Trust. The etf trades about -0.25 of its potential returns per unit of risk. The First Trust Consumer is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  6,724  in First Trust Consumer on September 27, 2024 and sell it today you would lose (103.00) from holding First Trust Consumer or give up 1.53% of portfolio value over 90 days.

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

Consumer Staples Select  vs.  First Trust Consumer

Consumer Staples Select

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Consumer Staples Select has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable essential indicators, Consumer Staples is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

First Trust Consumer

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Consumer are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, First Trust is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Consumer Staples and First Trust

The main advantage of trading using opposite Consumer Staples and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Consumer Staples 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 Consumer Staples Select and First Trust Consumer 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.