High Beta Index

Our friend Maggie really likes to live on the edge. Skydiving, bungee jumping, cosmetics testing—she’s done it all. And when it comes to investing, there’s nothing she likes more than the thrill of high beta indexes. A “high beta index” is an index made up of stocks with a higher volatility than the market average, which can make them a riskier investment.

In this scenario, “beta” refers to how much volatility, or sensitivity to market changes, we’ve got going on. What we do is we take a benchmark—maybe it’s another stock index, or maybe it’s a collection of similar assets—and we look at how our asset moves in comparison with the benchmark. A beta of 1 means that the asset in question has the same amount of volatility as the benchmark. They’re moving together. A beta below one means that an asset is less volatile, while a beta over one means it’s more volatile. Stocks with a beta of 2 or greater (they’re roughly twice as volatile as their benchmarks) are considered high-beta stocks. Put a bunch of those together, and we’ve got ourselves a high beta index. The most popular one is the S&P High Beta 100, but there are others out there as well.

As much as Maggie loves seeking thrills and taking chances, she also understands the importance of risking responsibly. She never skydives with a parachute that wasn’t packed by a certified rigger, and she never automatically assumes that a stock or stock index’s past performance is a guarantee of its future behavior. She also understands that increased volatility doesn’t necessarily translate to increased profits, though it can present her with opportunities to capitalize on short-term gains, which provides its own kind of thrill.