High Beta: Worth The Risk?

As the global markets continue to recover from the waves of recession, some investors are looking to regain their losses as quickly as possible, no matter the risk. The ETF space, with over 1400 different and niche funds, includes a number of offerings that fit this build, including high beta funds. This new breed of ETF is perfect for an investor that wants to make their money and leave, as long as they don’t mind taking a considerable gamble on unpredictable market moves   [see Visual History Of The S&P 500].

High beta funds are ETFs that target high beta stocks in a given market, giving investors new tools for amplifying their exposure to volatile equities within a chosen index, such as the S&P 500.

Do They Fit In Your Portfolio?

These ETFs give investors tools for focusing on the most volatile stocks–even in more conventional markets–making the funds efficient ways to increase risk exposure and overall volatility. As such, high beta ETFs could potentially be used as a way to increase volatility in anticipation of strong short- or medium-term performance in the index market; they may also have appeal as components of a longer-term portfolio for investors who believe that taking on higher volatility can lead to higher returns over the long haul [see 10 Questions About ETFs You've Been Too Afraid To Ask].

The chart below highlights both traditional index funds and their high beta counterparts, revealing the differences between the historical performances, 50-day volatility and portfolio size:

• SPDR S&P 500 (SPY, A)
• S&P 500 High Beta Portfolio (SPHB, C+)
• MSCI Emerging Markets Index Fund (EEM, A-)
• S&P Emerging Markets High Beta Portfolio (EEHB, B)
• MSCI EAFE Index Fund (EFA, A+)
• S&P International Developed High Beta Portfolio (IDHB, C+)

google.load('visualization', '1', {packages: ['corechart']}); function drawVisualization() { // Create and populate the data table. var data = google.visualization.arrayToDataTable([ ['ETF', '1-year Performance (%)', '50 Day Volatility', 'ETF', 'Total # of Holdings'], ['SPY', 11.23, 11.99, 'SPY', 501], ['SPHB', 3.42, 18.31, 'SPHB', 100], ['EEM', -1.60, 11.21, 'EEM', 858], ['EEHB', -3.56, 26.52, 'EEHB', 199], ['EFA', 7.08, 13.03, 'EFA', 929], ['IDHB', 3.03, 36.02, 'IDHB', 202], ]); var options = { title: ' High Beta Vs.Equity ETFs', hAxis: {title: '1-year Performance (%)'}, vAxis: {title: '200 Day Volatility'}, bubble: {textStyle: {fontSize: 11}} }; // Create and draw the visualization. var chart = new google.visualization.BubbleChart( document.getElementById('visualization75883')); chart.draw(data, options); } google.setOnLoadCallback(drawVisualization);

Though this comparison is only based on one-year historical returns and 50 day volatility, it is important for investors to take a close look under the hood of the various weighting and selection methodologies, as these differences often have a material impact on bottom line returns.

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Disclosure: No positions at time of writing.

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