What Is a High Beta Index?
Let me explain to you what a high beta index really is—it's essentially a basket of stocks that show more volatility than a broad market index like the S&P 500. The most recognized one is the S&P 500 High Beta Index, which follows the performance of 100 companies from the S&P 500 that react most strongly to market changes.
Beta itself measures the volatility or systematic risk of an asset compared to the entire market. Beyond the main large-cap version, Standard and Poor's provides high beta options for small-cap, mid-cap, and other indexes as well.
High Beta Index Explained
When I talk about high beta index companies, I'm referring to those that are more sensitive to the broader market's movements, and we measure this sensitivity with the beta of each stock. A beta of 1 means the asset moves right in step with the market; anything below 1 suggests less volatility, and above 1 points to more.
Take a beta of 1.2, for instance—that means the asset is 20% more volatile than the market. On the flip side, a beta of 0.70 would be theoretically 30% less volatile. We calculate beta against a major index like the S&P 500.
To get exposure to a high beta index, you'll need something like an exchange-traded fund (ETF). The Invesco S&P 500 High Beta ETF (SPHB) is a popular choice that tracks these volatile stocks in the broader market, though it has underperformed the S&P 500 since it started. Financial companies make up almost 30% of its assets, with top holdings including Discover Financial Services (DFS), Lincoln National Corp (LNC), and Invesco (IVZ).
Limitations of a High Beta Index
You might think high beta or volatility automatically leads to bigger returns, but that's not the case—contrary to what many believe. The High Beta S&P 500 Index has underperformed its benchmark for years, even during times when the broader market was steadily rising.
Research actually indicates that low volatility stocks often deliver better risk-adjusted returns than high volatility ones. This outperformance of low beta can stem from investor behavioral biases, like the representative heuristic and overconfidence. Plus, factors such as sector selection and other fundamentals significantly affect the volatility and overall performance of a high beta index.
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