Betas Can Help Match One’s Equity Holdings With One’s Risk Tolerance

Bob Carey
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Betas Can Help Match One’s Equity Holdings With One’s Risk Tolerance

Posted Under: Sectors

View from the Observation Deck

Today's blog post is a follow-up to last week's "This 50/50 Sector Combo Has Captured Upside While Mitigating Much Of The Downside" post that showed how investors can be defensive and still potentially build wealth.
Beta is just one way of measuring a stock's, or in this case a sector's, volatility relative to that of the broader market. In the chart above, the S&P 500 represents the broader market, and is assigned a beta base value of 1.00.
Those sectors in the chart with a beta of less than 1.00 are considered to be less volatile than the S&P 500, while those with a beta above 1.00 are considered to be more volatile.
Here are the sectors with current betas <1.00: 0.56 (Utilities); 0.64 (Consumer Staples); 0.69 (Telecommunication Services); and 0.76 (Health Care).
Here are the sectors with current betas >1.00: 1.03 (Consumer Discretionary); 1.04 (Information Technology); 1.09 (Industrials); 1.14 (Materials); 1.22 (Energy); and 1.29 (Financials).
Beta values can change over time. The S&P 500 Information Technology Index currently has a beta of 1.04, compared to 1.28 at the close of March 2000 (Internet Bubble burst), according to Bloomberg.
Monitoring key metrics like betas, price-to-earnings ratios and earnings estimates can help an investor adhere to their risk tolerance level as well as potentially exploit opportunities in the market, in our opinion.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance, while the S&P Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.

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Posted on Tuesday, November 12, 2013 @ 3:50 PM • Post Link

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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

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