Correlation Between First Trust and Energy Select

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Can any of the company-specific risk be diversified away by investing in both First Trust and Energy Select 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 First Trust and Energy Select into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between First Trust Energy and Energy Select Sector, you can compare the effects of market volatilities on First Trust and Energy Select 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 First Trust with a short position of Energy Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Trust and Energy Select.

Diversification Opportunities for First Trust and Energy Select

0.98
  Correlation Coefficient

Almost no diversification

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

Pair Corralation between First Trust and Energy Select

Considering the 90-day investment horizon First Trust is expected to generate 1.11 times less return on investment than Energy Select. In addition to that, First Trust is 1.08 times more volatile than Energy Select Sector. It trades about 0.03 of its total potential returns per unit of risk. Energy Select Sector is currently generating about 0.04 per unit of volatility. If you would invest  7,369  in Energy Select Sector on December 29, 2023 and sell it today you would earn a total of  2,072  from holding Energy Select Sector or generate 28.12% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

First Trust Energy  vs.  Energy Select Sector

 Performance 
       Timeline  
First Trust Energy 

Risk-Adjusted Performance

14 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Energy are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in April 2024.
Energy Select Sector 

Risk-Adjusted Performance

16 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Energy Select Sector are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak essential indicators, Energy Select exhibited solid returns over the last few months and may actually be approaching a breakup point.

First Trust and Energy Select Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with First Trust and Energy Select

The main advantage of trading using opposite First Trust and Energy Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust position performs unexpectedly, Energy Select 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 Energy Select will offset losses from the drop in Energy Select's long position.
The idea behind First Trust Energy and Energy Select Sector 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.
Check out your portfolio center.
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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.

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