Calculation and mechanics
The basis is the Pearson correlation coefficient of the daily percentage returns of two instruments, in Foliograph over 30 trading days.
A value near +1 means that the returns move very much in step. A value near -1 means an inverse linear relationship. A value near 0 means that no pronounced linear relationship exists.
The absolute size of the swings need not be equal: if one ETF regularly moves about twice as much as another but the moves are proportional, the correlation can still be near +1.
The matrix is symmetric and the diagonal is 1. With a short window such as 30 trading days, the metric reacts relatively quickly to new market phases. Individual extreme days can noticeably affect the result.
r = covariance(return A, return B) / (stdev A x stdev B)
Distinction
Correlation is not beta. It describes the linear co-movement of two return series, not how much one instrument moves relative to the other.
Nor is it the return relative to a benchmark, which measures the difference in total returns over a period. High correlation between two country ETFs can arise, for example, from similar sectors, shared holdings or common global market influences.
Related terms
- Country ETF (Single-country ETF)
- Return Relative to a Benchmark (Relative performance, vs SPY, vs ACWI)
- Holdings (Positions of an ETF, top holdings)
- Historical Volatility (Realised Volatility, HV)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.