Correlation Between MicroSectors FANG and Invesco Aerospace

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

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

Diversification Opportunities for MicroSectors FANG and Invesco Aerospace

-0.56

Correlation Coefficient

MicroSectors FANG  Invesco Aerospace

Excellent diversification

The 3 months correlation between MicroSectors and Invesco is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Invesco Aerospace Defense in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco Aerospace Defense and MicroSectors FANG 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 MicroSectors FANG Index are associated (or correlated) with Invesco Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco Aerospace Defense has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Invesco Aerospace go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Invesco Aerospace

Given the investment horizon of 90 days MicroSectors FANG Index is expected to under-perform the Invesco Aerospace. In addition to that, MicroSectors FANG is 5.4 times more volatile than Invesco Aerospace Defense. It trades about -0.13 of its total potential returns per unit of risk. Invesco Aerospace Defense is currently generating about 0.11 per unit of volatility. If you would invest  8,130  in Invesco Aerospace Defense on February 7, 2024 and sell it today you would earn a total of  2,163  from holding Invesco Aerospace Defense or generate 26.61% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.63%
Values	Daily Returns

MicroSectors FANG Index  vs.  Invesco Aerospace Defense

MicroSectors FANG Index

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MicroSectors FANG Index has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Etf's technical and fundamental indicators remain rather sound which may send shares a bit higher in June 2024. The latest tumult may also be a sign of longer-term up-swing for the fund shareholders.

Invesco Aerospace Defense

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco Aerospace Defense are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite somewhat inconsistent basic indicators, Invesco Aerospace may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with MicroSectors FANG and Invesco Aerospace

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

The idea behind MicroSectors FANG Index and Invesco Aerospace Defense 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 Money Managers module to screen money managers from public funds and ETFs managed around the world.