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Reviewed by JeFreda R. Brown
Key Takeaways
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A high beta index is a collection of stocks with greater volatility than a broader market index like the S&P 500.
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The beta measures a stock’s volatility relative to the market, with a beta over 1 indicating greater volatility.
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The S&P 500 High Beta Index includes the 100 most volatile stocks in the S&P 500.
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Higher beta does not necessarily lead to greater returns, as demonstrated by the S&P 500 High Beta Index’s historical performance.
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Investing in a high beta index can be done through vehicles like the Invesco S&P 500 High Beta ETF.
What Is a High Beta Index?
A High Beta Index is a collection of stocks known for their higher volatility compared to standard market indices like the S&P 500. Volatility indicates how much a stock’s price can fluctuate, which can represent higher risks but also potential for higher returns. The S&P 500 High Beta Index focuses on 100 of the most market-sensitive companies within the broader S&P 500, offering investors insights into performance fluctuations.
Understanding High Beta Index Volatility
High beta index companies exhibit greater sensitivity than the broader market. Sensitivity is measured by the beta of an individual stock. A beta of 1 indicates the asset moves in line with the market. Anything less than 1 represents an asset less volatile than the market, while greater than 1 suggests a more volatile asset.
For example, a beta of 1.2 means the asset is 20% more volatile than the market. Conversely, a beta of 0.70 is theoretically 30% less volatile than the market. Beta is measured against a widely followed index such as the S&P 500 Index.
Gaining exposure to a high beta index requires an investment vehicle such as an exchange traded fund (ETF). The Invesco S&P 500 High Beta ETF (SPHB) is a widely traded asset that tracks volatile assets in the broader market. The ETF has underperformed the underlying S&P 500 Index since its inception. Financial companies constitute nearly 30% of the fund’s assets, with Discover Financial Services (DFS), Lincoln National Corp (LNC) and Invesco (IVZ) among its largest holdings.
Challenges and Risks of High Beta Index Investing
Contrary to popular belief, high beta or volatility doesn’t necessarily translate into greater returns. For many years, the High Beta S&P 500 Index has underperformed its underlying benchmark. This occurred during a period of unyielding improvement in the broader market.
Instead, research shows that low volatility stocks tend to earn greater risk-adjusted returns than high volatility stocks. The reason low beta tends to outperform can be attributed to investment behavioral biases, such as the representative heuristic and overconfidence. In addition, sector selection and other fundamental criteria play an important role in the volatility and performance of a high beta index.
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