Correlation Between MicroSectors FANG and Innovator Hedged

Can any of the company-specific risk be diversified away by investing in both MicroSectors FANG and Innovator Hedged 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 Innovator Hedged 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 Innovator Hedged Nasdaq 100, you can compare the effects of market volatilities on MicroSectors FANG and Innovator Hedged 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 Innovator Hedged. Check out your portfolio center. Please also check ongoing floating volatility patterns of MicroSectors FANG and Innovator Hedged.

Diversification Opportunities for MicroSectors FANG and Innovator Hedged

0.98

Correlation Coefficient

MicroSectors FANG  Innovator Hedged

Almost no diversification

The 3 months correlation between MicroSectors and Innovator is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding MicroSectors FANG Index and Innovator Hedged Nasdaq 100 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Innovator Hedged Nasdaq 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 Innovator Hedged. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Innovator Hedged Nasdaq has no effect on the direction of MicroSectors FANG i.e., MicroSectors FANG and Innovator Hedged go up and down completely randomly.

Pair Corralation between MicroSectors FANG and Innovator Hedged

Given the investment horizon of 90 days MicroSectors FANG Index is expected to generate 5.5 times more return on investment than Innovator Hedged. However, MicroSectors FANG is 5.5 times more volatile than Innovator Hedged Nasdaq 100. It trades about 0.27 of its potential returns per unit of risk. Innovator Hedged Nasdaq 100 is currently generating about 0.32 per unit of risk. If you would invest  43,034  in MicroSectors FANG Index on September 4, 2024 and sell it today you would earn a total of  9,382  from holding MicroSectors FANG Index or generate 21.8% return on investment over 90 days.

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

MicroSectors FANG Index  vs.  Innovator Hedged Nasdaq 100

MicroSectors FANG Index

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in MicroSectors FANG Index are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting technical and fundamental indicators, MicroSectors FANG unveiled solid returns over the last few months and may actually be approaching a breakup point.

Innovator Hedged Nasdaq

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Innovator Hedged Nasdaq 100 are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak fundamental indicators, Innovator Hedged may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with MicroSectors FANG and Innovator Hedged

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

The idea behind MicroSectors FANG Index and Innovator Hedged Nasdaq 100 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.