High Beta Indexes: Unlocking the Secrets of Stock Volatility
Understanding High Beta Indexes
A high beta index is a collection of stocks exhibiting greater volatility than a broad market index, such as the S&P 500. One of the most recognized high beta indexes is the S&P 500 High Beta Index, which tracks the performance of the 100 companies within the S&P 500 that show the highest sensitivity to market returns.
Beta quantifies the volatility or systematic risk of an asset in comparison to the overall market. Various high beta indexes cater to different market segments, including small-cap and mid-cap stocks.
High Beta Index: Deep Dive
Companies within a high beta index demonstrate heightened sensitivity compared to the broader market; this sensitivity is captured by the beta of each stock. A beta of 1 means the stock’s price moves with the market. When beta is below 1, the stock is less volatile than the market. A value greater than 1 signifies higher volatility.
For instance, a beta of 1.2 indicates a 20% higher volatility than the market, whereas a beta of 0.70 suggests 30% less volatility. Typically, beta is evaluated against well-known indexes like the S&P 500.
Investing in high beta indexes can be done through vehicles like exchange traded funds (ETFs). One of the prevalent options is the Invesco S&P 500 High Beta ETF (SPHB), which tracks highly volatile assets in the broader market. However, it’s noteworthy that this ETF has historically underperformed compared to the S&P 500 Index. Financial companies like Discover Financial Services (DFS), Lincoln National Corp (LNC), and Invesco (IVZ) make up nearly 30% of the fund’s holdings.
The Limitations of High Beta Indexes
High beta does not inherently guarantee superior returns. For many years, the S&P 500 High Beta Index has lagged behind its broader benchmark, despite a persistently improving market.
Research often indicates that low volatility stocks might offer better risk-adjusted returns than high volatility ones. This trend can be traced back to behavioral biases like overconfidence and heuristic thinking. Moreover, sector selection and fundamentals also affect the performance and volatility of high beta indexes.
By understanding high beta indexes, investors can make more informed decisions about incorporating these volatile assets into their investment portfolios.
Related Terms: Beta, Volatility, Exchange Traded Fund, S&P 500.
References
- S&P Dow Jones Indices. “S&P 500 High Beta Index”.
- Invesco. “Invesco S&P 500 High Beta ETF”.
- Invesco. “SPHB - Invesco S&P 500 High Beta ETF: Fund Holdings”.
- S&P Dow Jones Indices. “S&P 500 High Beta Index - Factsheet”, Page 2.
