High Beta Index

What Is a High Beta Index?

A high beta index is a basket of stocks that exhibits greater volatility than a wide market index like the S&P 500 Index. The S&P 500 High Beta Index is the most notable of these indexes. It tracks the performance of 100 companies in the S&P 500 that are the most sensitive to changes in market returns.

Beta is the amount of volatility or systematic risk an asset exhibits compared to the market as a whole. Other than the leader enormous cap index, Standard and Poor's offers a number of high beta varieties for small-cap, mid-cap and other market indexes.

High Beta Index Explained

High beta index companies display greater sensitivity than the more extensive market. Sensitivity is estimated by the beta of an individual stock. A beta of 1 demonstrates the asset moves in accordance with the market. Anything short of 1 addresses an asset less unpredictable than the market, while greater than 1 recommends a more unstable asset.

For instance, a beta of 1.2 means the asset is 20% more unpredictable than the market. On the other hand, a beta of 0.70 is hypothetically 30% less unpredictable than the market. Beta is estimated against a widely followed index like the S&P 500 Index.

Acquiring exposure to a high beta index requires an investment vehicle, for example, a exchange traded fund (ETF). The Invesco S&P 500 High Beta ETF (SPHB) is a widely traded asset that tracks unstable assets in the more extensive market. The ETF has failed to meet expectations the underlying S&P 500 Index since its commencement. Financial companies comprise almost 30% of the fund's assets, with Discover Financial Services (DFS), Lincoln National Corp (LNC) and Invesco (IVZ) among its biggest holdings.

Limitations of a High Beta Index

As opposed to prevalent thinking, high beta or volatility doesn't be guaranteed to convert into greater returns. For a long time, the High Beta S&P 500 Index has failed to meet expectations its underlying benchmark. This happened during a period of resolute improvement in the more extensive market.

All things being equal, research shows that low volatility stocks will generally earn greater risk-adjusted returns than high volatility stocks. The explanation low beta will in general outperform can be credited to investment behavioral biases, like the representative heuristic and presumptuousness. Likewise, sector selection and other fundamental criteria play an important job in the volatility and performance of a high beta index.