Correlation Between Vanguard Small-cap and Ishares Russell

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Can any of the company-specific risk be diversified away by investing in both Vanguard Small-cap and Ishares Russell 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 Vanguard Small-cap and Ishares Russell into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Vanguard Small Cap Index and Ishares Russell 2000, you can compare the effects of market volatilities on Vanguard Small-cap and Ishares Russell 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 Vanguard Small-cap with a short position of Ishares Russell. Check out your portfolio center. Please also check ongoing floating volatility patterns of Vanguard Small-cap and Ishares Russell.

Diversification Opportunities for Vanguard Small-cap and Ishares Russell

0.96
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Vanguard and Ishares is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding VANGUARD SMALL-CAP INDEX and IShares Russell 2000 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ishares Russell 2000 and Vanguard Small-cap 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 Vanguard Small Cap Index are associated (or correlated) with Ishares Russell. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ishares Russell 2000 has no effect on the direction of Vanguard Small-cap i.e., Vanguard Small-cap and Ishares Russell go up and down completely randomly.

Pair Corralation between Vanguard Small-cap and Ishares Russell

Assuming the 90 days horizon Vanguard Small Cap Index is expected to generate 0.87 times more return on investment than Ishares Russell. However, Vanguard Small Cap Index is 1.15 times less risky than Ishares Russell. It trades about 0.06 of its potential returns per unit of risk. Ishares Russell 2000 is currently generating about 0.04 per unit of risk. If you would invest  9,354  in Vanguard Small Cap Index on December 29, 2023 and sell it today you would earn a total of  1,557  from holding Vanguard Small Cap Index or generate 16.65% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy99.63%
ValuesDaily Returns

VANGUARD SMALL-CAP INDEX  vs.  IShares Russell 2000

 Performance 
       Timeline  
Vanguard Small-cap Index 

Risk-Adjusted Performance

8 of 100

 
Low
 
High
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Small Cap Index are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly fragile basic indicators, Vanguard Small-cap may actually be approaching a critical reversion point that can send shares even higher in April 2024.
Ishares Russell 2000 

Risk-Adjusted Performance

4 of 100

 
Low
 
High
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in Ishares Russell 2000 are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Ishares Russell is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Small-cap and Ishares Russell Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Vanguard Small-cap and Ishares Russell

The main advantage of trading using opposite Vanguard Small-cap and Ishares Russell positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Small-cap position performs unexpectedly, Ishares Russell 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 Ishares Russell will offset losses from the drop in Ishares Russell's long position.
The idea behind Vanguard Small Cap Index and Ishares Russell 2000 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.

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