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Chart of the Day: Don't Forget About Beta
During this recent correction I've received the same question from various investors: “Why did my best stocks drop the most?” The simple answer is that your best stocks probably had the highest Beta and therefore were expected to drop the most.
So what is Beta? Beta: Coefficient that measures the volatility of a stock or ETF's returns relative to the market (the S&P 500). A stock or ETF with a higher beta than the S&P 500 will rise or fall to a greater degree. In contrast, a stock or ETF with a low beta will rise or fall less.
Let's look at the Beta of 3 common investments:
- S&P 500 ETF (IVV) has a Beta of 1,00
- NASDAQ 100 ETF (QQQ) has a Beta of 1.11
- Apollo Asset Management (APO) has a Beta of 1.59
We can see that over the last 5 years IVV is up 81.19%, QQQ is up 138.78% and APO is up 175.11%. Easy to see the correlation between Beta and investment gain.
Will we see that the stock that went up the most during the 5 year bull market will be the stock that corrects the most during the correction?
Let's look at how far each is off their most recent high:
- IVV is 6.16% from its recent high
- QQQ is 11.03% off its recent high
- APO is 18.21% off its recent high
Simply put the stocks that go up the most in a bull market are the ones that most likely will go down the most in a market correction.
The good news is AFTER the corrrection your higher Beta investments will probably recover the fastest.
On the date of publication, Jim Van Meerten had a position in: IVV, QQQ, APO. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
