Equity beta. What does ishares mean?

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Always passive
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Equity beta. What does ishares mean?

Post by Always passive »

iShares reports the equity beta of LQD, the corporate bond ETF, to be 0.01.

And the definition of equity beta given by iShares is:

“Beta is a measure of the tendency of securities to move with the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 indicates the security tends to be less volatile than the market, while a beta greater than 1 indicates the security is more volatile than the market.
Calculated vs. S&P 500”

See https://www.ishares.com/us/products/239 ... e-bond-etf

I do agree with iShares’ definition of beta as volatility relative to market, although I cannot understand how they calculated to be 0.01, to me it seems too low. But I have a bigger problem with their first statement: a measure of the tendency of securities to move with the market as a whole.

Any comments?
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grabiner
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Re: Equity beta. What does ishares mean?

Post by grabiner »

Beta has a statistical definition. If a fund has the same performance when the stock market is up or down, the beta is zero. If it gains 5% more when the stock market is up 10% than when it is level, the fund has a beta of 0.5.

Thus equity beta is not a measure of volatility, but of the part of volatility which is correlated with the stock market. High-quality bond funds are likely to have near-zero beta, not because they have extremely stable returns but because their own volatility has little correlation with stock volatility. This makes them excellent for diversification.
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Re: Equity beta. What does ishares mean?

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (theory).
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Re: Equity beta. What does ishares mean?

Post by lack_ey »

It's just the coefficient that pops out when they run a linear regression on past LQD returns vs. stock market returns.

I don't know offhand the exact nature of the calculation, whether it's daily or weekly or some other return series used, and how many months of past data are used, etc. All these things would change the answer somewhat.

What we've seen over the last several years is that pure Treasury funds have had negative equity market beta, while investment-grade corporate bond funds have been closer to zero. The credit risk adds a component that moves more with equities, but has provided an excess return above what the equity relation would imply, in part driven here by credit spreads narrowing.
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Re: Equity beta. What does ishares mean?

Post by pkcrafter »

Reuters shows beta of LQD as 0.08, but I wonder if it should be compared to the market. M* compares to a U.S Credit Bond Index and beta is 1.23.

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Re: Equity beta. What does ishares mean?

Post by oldcomputerguy »

Maybe I’m missing something. As I understand, beta is an expression of how much of the security’s change is explained by change in the market. If iShares’s figure for LQD’s beta is calculated against the S&P500, then i’m not at all surprised at the low figure. LQD is a bond fund, so figuring against an equity index is bound to result in a low beta figure. Or am I not seeing something?
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Re: Equity beta. What does ishares mean?

Post by Northern Flicker »

Technically, beta applies to stocks, and is a coefficient applied to market returns in CAPM and factor models to scale the sensitivity of the stock to market movements.

Mutual fund companies often regress the performance of other assets to the stock market and report the beta of say a bond portfolio, which measures both the correlation and correlated sensitivity of the portfolio return to stock market returns.

Correctness and reliability of the regression models would mean that beta is constant over time. Stock beta is moderately reliable but tends to drift over time. I don't pay much attention to reported beta of an asset or portfolio with respect to a different asset class because reliability is often low.

Bonds are sometimes negatively correlated with stocks and sometimes positively correlated with stocks. This will lead to shifts in computed betas. Reporting betas that have low reliability then just becomes a measure of relative past performance that the reporting company will tell you does not predict future returns
Last edited by Northern Flicker on Sun Nov 26, 2017 8:35 pm, edited 1 time in total.
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Re: Equity beta. What does ishares mean?

Post by patrick013 »

oldcomputerguy wrote: Sun Nov 26, 2017 11:33 am Maybe I’m missing something. As I understand, beta is an expression of how much of the security’s change is explained by change in the market. If iShares’s figure for LQD’s beta is calculated against the S&P500, then i’m not at all surprised at the low figure. LQD is a bond fund, so figuring against an equity index is bound to result in a low beta figure. Or am I not seeing something?
That's exactly what it is supposed to do. Markets are affected by all kinds of events.
Information of any kind can cause stocks and indexes to rise or fall. Some jump
higher or less because of their sensitivity to market info and cycles. Beta tries
to put that into a number compared to the market, prominently the 500 index in
the U.S. A utility index doesn't care much about the national economy and has a
low beta. Small cap funds feed on new products and technology sometimes and
usually have higher betas as their growth can depend on economic health and
expenditures. Beta is one of the best measures of risk as it determines how a security
affects the risk of an entire portfolio. Bad news is as bad as good news is good related
to the beta metric theoretically. A low beta means stability of current price, a steadier
return if the market is having somewhat high price swings.

Ever TLH a good reinvestment is a small cap fund as the higher beta will recover faster
as the market rises to a new equilibrium price after a correction.
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Re: Equity beta. What does ishares mean?

Post by asset_chaos »

Vanguard's intermediate corporate bond fund vicsx has a similar loading on beta. From portfolio visualizer with data from 2010

Code: Select all

Factor	Loading	Standard Error	t-stat	p-value	95% Confidence Interval
Market (Rm-Rf)	0.04	0.025	1.488	0.141	-0.013...0.088
Size (SMB)	-0.03	0.031	-0.813	0.418	-0.088...0.037
Value (HML)	-0.06	0.030	-2.130	0.036	-0.125...-0.004
Term Risk (TRM)	0.47	0.026	18.063	0.000	0.415...0.517
Credit Risk (CDT)	0.53	0.048	11.113	0.000
And the t-stat, p-value numbers say the loadings on the stock factors are not different from zero, while the term and credit loadings are reliably different from zero. The bottom line is that I guess a bond fund not loading on the stock market is not surprising.

Perhaps the OP's surprise came from remembering Larry Swedroe saying many times that high yield corporate bonds are bad investments because they unfavorably combine stock and bond characteristics. Loadings for vaanguard's high yield bond fund vwehx are

Code: Select all

Factor	Loading	Standard Error	t-stat	p-value	95% Confidence Interval
Market (Rm-Rf)	0.22	0.033	6.648	0.000	0.152...0.281
Size (SMB)	-0.02	0.040	-0.533	0.595	-0.101...0.058
Value (HML)	0.02	0.039	0.460	0.647	-0.059...0.095
Term Risk (TRM)	0.33	0.033	9.906	0.000	0.262...0.394
Credit Risk (CDT)	0.52	0.062	8.473	0.000
Here, for junk bonds, there is a significant loading on the market factor, as well as on term and credit.
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Re: Equity beta. What does ishares mean?

Post by magician »

Always passive wrote: Sat Nov 25, 2017 7:59 am “Beta is a measure of the tendency of securities to move with the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 indicates the security tends to be less volatile than the market, while a beta greater than 1 indicates the security is more volatile than the market.
This definition is wrong.

Beta is not a comparison of the security's price to the market's price; it's a comparison of the security's returns to the market's return. Saying that it indicates how the security's price will move with the market is wrong.

Beta is the product of the relative volatility of security's returns to the market's returns and the correlation of the security's returns and the market's returns. To say that a beta less than 1 indicates that the security('s returns) tend to be less volatile than the market('s returns) is wrong: the security's returns could be 2, 3, 5, 10, 20 times as volatile as the market's returns, with a correspondingly low correlation of returns.

I hate this junk. These people are supposed to be experts in finance, and investors turn to them for education and advice. What they have here is garbage, and they should be ashamed of themselves for getting it so wrong.
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patrick013
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Re: Equity beta. What does ishares mean?

Post by patrick013 »

magician wrote: Thu Jan 17, 2019 6:19 pm
Beta is not a comparison of the security's price to the market's price; it's a comparison of the security's returns to the market's return. Saying that it indicates how the security's price will move with the market is wrong.
No doubt there is a simple beta that can be calc'd from annual returns but many market technicians use a price beta which is calc'd using 3 years or more of price data only, usually. When I went to school price beta was very common.

What is beta and how to calculate it in Excel?
Calculating Beta: Portfolio Math For The Average Investor
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Re: Equity beta. What does ishares mean?

Post by magician »

patrick013 wrote: Fri Jan 18, 2019 2:40 pm
magician wrote: Thu Jan 17, 2019 6:19 pm Beta is not a comparison of the security's price to the market's price; it's a comparison of the security's returns to the market's return. Saying that it indicates how the security's price will move with the market is wrong.
No doubt there is a simple beta that can be calc'd from annual returns but many market technicians use a price beta which is calc'd using 3 years or more of price data only, usually. When I went to school price beta was very common.

What is beta and how to calculate it in Excel?
Calculating Beta: Portfolio Math For The Average Investor
Price beta may be common, but it's not beta (i.e., the beta that originated in the Capital Asset Pricing Model (CAPM)).

However, it is not uncommon for finance types to misuse terms they don't understand, and thereby lead others astray. (I don't mean you; I mean the people who taught that to you.)

I wouldn't rely too heavily on definitions in Investopedia; I've found many errors there. Note, for example, that in their glossary entry for beta, they correctly state that it is a comparison of returns (not prices), but that in the two articles you cite they say that it's a comparison of prices. That's not intended to vindicate their article on beta, because it contains a fair amount of garbage. For example:

"If a stock has a beta of 1.00, it indicates that its price is correlated with the market."

I don't know what "correlated with the market" means, but here they're talking about price whereas in their definition they're talking about returns. If this is supposed to mean that the correlation of the security's (return/price/whatever) with the market's (return/price/whatever) is +1.0, it's wrong.

"A beta of less than 1.00 means that the security is theoretically less volatile than the market which means the portfolio is less risky with the stock included than without it."

Completely wrong.

A security can have volatility (of return/price/whatever) that's 50% greater than that of the market, or twice as great, or ten times as great and still have a beta that is less than 1.00 (because the correlation of (returns/prices/whatever) is sufficiently small).

Sorry for the rant, but I get really, really irritated when sources that are supposed to be educating people get their subject matter so completely wrong.
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patrick013
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Re: Equity beta. What does ishares mean?

Post by patrick013 »

magician wrote: Sat Jan 19, 2019 2:44 am
A security can have volatility (of return/price/whatever) that's 50% greater than that of the market, or twice as great, or ten times as great and still have a beta that is less than 1.00 (because the correlation of (returns/prices/whatever) is sufficiently small).
There are certain scenarios where the figures give ironic results. Utility indexes usually have lower volatility both SD and beta(either) but have similar or higher returns than the market portfolio. "Earnings Quality" is considered better then as the return is achieved with lower market or return volatility measurement.

Small cap indexes with betas over 1 usually have somewhat higher returns then the market portfolio. Nothing ironic about that.

Beta should be considered a dynamic correlation as it can measure differences plus or minus 1 and therefore can give a measurement more concise than mere correlation. I rarely use CAPM as beta gives most of the info I need. Equilibration to market rarely happens it seems. So I actually prefer beta in the long run but like to discern which beta to use or at least know which beta is being used. SD I just live with.
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