Skip to Content
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.

Mentioned: , , , , ,

 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.

To view this article, become a Morningstar Basic member.

Register for Free

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