When an exchange-traded fund (ETF) is associated with high or low beta, what exactly does that entail? It all boils down to risk and how much an investor is willing to accept, which is different for everybody.
So in essence, beta is a metric that can measure risk or just how volatile an asset can be relative to the overall market. Volatility is associated with how much the value of an asset can fluctuate, so in terms of ETFs, a high-beta ETF suggests a more volatile fund, and vice versa for a low-beta ETF.
Does the adage of “no risk, no reward” hold up when it comes to high-beta ETFs? In times when the market is rallying, that could be the case. Right now, the S&P 500 is up about 5% and the S&P High Beta Index is up about 7.4%, providing a bit more performance compared the the index sans the high-beta component.
When you stretch out that timeframe to 10 years, the outperformance is still apparent with the high-beta index over 10% higher. As noted in the chart below, however, there are times when the high-beta index outdoes the regular index and when it falls below, which speaks to its higher volatility.
That said, on the opposite end of the spectrum, an ETF identified as low-beta could be ideal for investors who are more risk-averse. A low-beta ETF could be ideal in times when there are heavy market fluctuations in order to help minimize volatility.
