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How is "beta" relevant to long-term ETF investors?

Personal Finance & Money Asked on August 17, 2021

A portion of my investment portfolio is in index-tracking ETFs. On the whole, my ETF portfolio is diversified across many countries and industries. I intend to hold these ETFs for 20-40 years. I noticed that some financial data providers give a "beta" statistic for my ETFs. Given my long-term investment horizon, should I care about the "beta" of my ETFs? What is the relevance of the "beta" volatility measure in the context of a diversified index-tracking ETF portfolio where the positions are held for decades?

One Answer

For equities and equity ETFs, Betas typically means "sensitivity to market returns". Meaning that if you have a Beta of 1.5, when the market goes up 2% one day, then the ETF on average will go up 3%. It's not an exact result, meaning it's not a certainty, but it's an average calculated from the history of price movements of the ETF compared to the movements to the market overall.

In more practical terms, a higher beta ETF is more risky than the market on average, and thus should expect higher returns. And vice-versa; a low-beta ETF is "safer" than the market on average. You can also have zero beta (the ETF movement is not correlated to the market at all) and negative beta, meaning the ETF tends to move against the market. Those are typically only found in ETFs that use derivatives to speculate on other factors than market price (e.g. "beta-neutral" or "inverse" funds).

Answered by D Stanley on August 17, 2021

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