Loading the player...

DEFINITION of 'High Beta Index'

A high beta index is a basket of stocks that exhibit greater volatility than a broad market index like the S&P 500. The S&P 500 High Beta Index is the most well-known of these indexes. It tracks the performance of 100 S&P 500 companies that are most sensitive to changes in market returns. Beta by definition is the amount of volatility or systematic risk, an asset exhibits compared to the market as a whole. Besides the flagship large cap index, Standard and Poor's (S&P) offers high beta variations of small-cap, mid-cap, and emerging markets to name a few. 

BREAKING DOWN 'High Beta Index'

A high beta index constituents exhibit greater sensitivity than the broad 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 and 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 like the S&P 500. 

Gaining exposure to a high beta index requires an investment vehicle like an exchange traded fund (ETF). The PowerShares S&P 500 High Beta Index (SPHB) is the most widely traded asset that tracks volatile assets in the broader market. Since inception, the ETF has underperformed the underlying S&P 500 Index. In fact, the index posted double-digit declines in 2015 as the scare of a China slowdown and earning recession punished the entire stock market. The largest allocation in the fund comes from the financial and industrial sectors with some individual holdings like Advanced Micro Devices (AMD) and Arconic (ARNC). 

Limitations of a High Beta Index

Contrary to popular belief, high beta or volatility doesn't necessarily translate to 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 broad 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 constraints behavioral biases like the representative heuristic and over confidence. In addition, sector selection and other fundamental criteria play an important role in the volatility and performance of a high beta index.

RELATED TERMS
  1. Beta

    Beta is a measure of the volatility, or systematic risk, of a ...
  2. Smart Beta

    Smart beta investing combines the benefits of passive investing ...
  3. Unlevered Beta

    Unlevered beta is the beta of a company without any debt, and ...
  4. Zero-Beta Portfolio

    A zero-beta portfolio is constructed to have no systematic risk, ...
  5. Dispersion

    Dispersion is a statistical term that describes the size of the ...
  6. Active Risk

    Active risk is a type of risk that a fund or managed portfolio ...
Related Articles
  1. Investing

    Build Diversity Through Beta

    In conjunction with stock valuation ratios like the price-to-earnings ratio and the price-to-earnings-growth ratio, a stock's measure of volatility known as beta can help investors build a diversified ...
  2. Investing

    Understanding Beta

    Beta is a measure of volatility. Find out what this means and how it affects your portfolio.
  3. Investing

    Smart Beta: Can Low Beta Equal High Risk?

    Low beta may not necessarily mean low risk when it comes to some smart beta strategies.
  4. Investing

    How To Calculate Beta Of A Private Company

    We explain two methods for calculating the beta of a private company.
  5. Investing

    How AQR Places Bets Against Beta

    Learn how the bet against beta strategy is used by a large hedge fund to profit from a pricing anomaly in the stock market caused by high stock prices.
  6. Investing

    5 High-Beta Stocks To Watch

    Check out five high-beta stocks that can help make your portfolio more exciting.
  7. Investing

    5 High-Beta Stocks To Watch

    Check out five high-beta stocks that can help make your portfolio more exciting.
  8. Investing

    5 Low-Beta DJIA Stocks To Know

    Check out five low-beta stocks that can help you to diversify your portfolio.
  9. Investing

    How To Reduce Volatility In Your Portfolio

    It's imperative that traders have a plan for when the market becomes tough to navigate. Here are some tips.
RELATED FAQS
  1. How does beta measure a stock's market risk?

    Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital ... Read Answer >>
  2. What Is the Formula for Calculating Beta?

    Learn about beta, how to calculate it, and how it's used as a risk measure with examples that include Apple and Tesla. Read Answer >>
  3. What's the difference between alpha and beta?

    Alpha is a measurement of a portfolio manager's performance in relation to the overall market. Beta gauges the volatility ... Read Answer >>
  4. How does debt affect a company's beta?

    Understand the difference between a company's levered beta and unlevered beta. Learn how debt affects a company's levered ... Read Answer >>
  5. When is it better to use unlevered beta than levered beta?

    Understand what a security's unlevered beta and levered beta measure, and learn which one is more accurate in measuring a ... Read Answer >>
Trading Center