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ETF Specialist

Not All Risk Is Rewarded

This fund targets the riskiest stocks in the S&P 500 Index, but it probably won't offer better long-term returns.

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 PowerShares S&P 500 High Beta (SPHB) targets some of the riskiest stocks in the S&P 500 Index in an attempt to boost returns during bull markets. However, these stocks will likely lag during market downturns. Investors in this fund should be prepared for a bumpy ride and have a high tolerance for risk. Although it is not suitable as a core portfolio holding, this fund could come in handy for those speculating on a quick rise in prices.

Beta measures a stock's sensitivity to movements of the market. For example, a stock with a beta of 1.5 should appreciate 1.5% for each 1% increase in the value of the market and shed 1.5% for each 1% decline in the market, at least in theory. All else equal, we would expect high-beta stocks to have higher risk and higher returns than the market. But this is not quite what we find in practice. High-beta stocks have historically offered lower risk-adjusted returns than their less-volatile counterparts, suggesting that the market has not offered adequate compensation for this incremental risk.

Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.