Low Beta Investing
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| Canadian Equities |
| International Equities |
| Commodities |
| Investment Styles |
Contents |
Introduction
Low Beta Investing (also called "Low-Volatility Investing") involves investment in stocks that have lower volatility than the market in an attempt to get higher returns. Although not formally a type of Value Investing, the stocks selected by this approach are more likely to be considered "value" rather than "growth".
Background
The term "beta" comes from the development of the Capital Asset Pricing Model (CAPM) in the 1960's. In short, this model theorized that investors should be rewarded for purchasing stocks that had a higher volatility (and, thus according to the model, a higher risk) than the market as a whole. The volatility was captured mathematically by a calculation called Beta.
The calculation of beta depends upon the measurement interval.[1]
Unfortunately for the model's proponents, further research[2][3] suggested that excess returns over the market could be obtained by purchasing low-beta stocks instead of high-beta ones.
Additionally, some investors favour low-volatility stocks because they are uncomfortable with high-volatility holdings.
Where to Find Beta
Some stock market quotation sources such as Globeinvestor provide beta with their stock quotes. There have also been some ETFs introduced in the Canadian and US markets that specifically target low-beta stocks.[4][5] The Canadian entry is ZLB from The Bank of Montreal. A low-volatility index has also been introduced by S&P/TSX.[6]
Types of Stocks
Low-beta stocks can be identified from the ZLB holdings, and typically include consumer staples, power generation, and telecommunications. The holdings of the S&P/TSX index are somewhat different, and include several REITs.[7]
References
- ↑ "Gummy", "Beta here Beta there", "Gummy Stuff", viewed Feb. 2, 2012.
- ↑ Malcolm Baker, Brendan Bradley, and Jeffrey Wurgler, Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly, Financial Analysts Journal Volume 67, Number 1, p.40 (2011).
- ↑ Jeff Benjamin, Surprising new research indicates that greater risk does not, in fact, lead to greater reward, Investment News, April 19, 2012.
- ↑ John Gabriel, A new ETF that exploits the low-volatility anomaly, Morningstar, viewed Feb. 3, 2012.
- ↑ Preet Banerjee, These ETFs Smooth Out the Market's Wild Roller-Coaster Ride, Globe and Mail, Jan. 20 2012.
- ↑ David Parkinson, Low Volatility index dominated by market’s traditionally defensive sectors – REITs, utilities and consumer staples, Globe and Mail, April 18 2012.
- ↑ Financial Webring, Low Beta Investing.
