Investors are always jittery about the risks associated with their investments. Mutual funds, stocks, bonds or ETFs, none of them are ever devoid of risks. A Bull rally may be interrupted anytime and drag a portfolio down. Also, markets may witness volatility; creating further doubts in investors' minds if fundamental factors can alone justify their investment decisions. While there are generally five indicators – alpha, beta, r-squared, standard deviation and the Sharpe ratio – for understanding investment risks, beta is the one that gives us better understanding related to volatility, or systematic risk, of a portfolio in comparison to the broader market.
Definition of Beta?
Also known as beta coefficient, it measures the volatility of a mutual fund (considering mutual funds) in contrast to broader markets. So, it measures the extent to which a fund's return may be affected or how much the price fluctuates owing to market conditions. Investopedia notes that “Essentially, beta expresses the fundamental tradeoff between minimizing risk and maximizing return”.
The calculation is complex though, and it is done through a statistical tool that is known as ‘regression analysis.' Based on the number we get via this, investors can gauge the volatility of the fund.
What Various Beta Numbers Suggest
Beta less than 0 – A negative beta indicates inverse relationship with broader markets. This is usually unlikely to happen except for some gold and gold funds that have betas less than 0.
Beta equal to 0 – The value of the fund would remain unchanged in this case and is not dependent on market movement.
Beta ranging from 0 to 1 – Funds having betas within this range will show less volatility than the broader markets.
Beta equal to 1 – A beta of 1 indicates that the fund would move in the same direction as that of the broader market.
Beta higher than 1 – This will indicate that the particular fund is more volatile than the broader indices.
3 Low Beta Funds to Buy
Risk-averse investors look for less volatility and mutual funds having beta within 0 to 1 are thus the best bets for them. Higher beta may mean that the fund would give higher return than broader markets, but it is also applicable the other way around. So, for a fund with beta of 2, if the broader markets jump 5%, the fund may return 10%. However, a decline of 10% in broader markets would mean the fund would slump by 20%.
So, risk-averse investors would prefer to neutralize losses and beta within 0-1 are the safest bets. For these investors, we will pick 5 low beta funds (three years) that also carry favorable ranks, making them potential investment options.
These funds also carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its peers in the future.
Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
The fund also carry low expense ratio and have no sales load.
Fidelity Select Utilities Portfolio (FSUTX – MF report) invests the majority of its assets in utility companies or those deriving a large share of their revenues from operations in this sector. The fund focuses on acquiring common stocks. Factors such as financial strength and economic conditions are considered to invest in companies throughout the world.
The fund carries a 3-year beta of 0.37 against standard index and currently holds a Zacks Mutual Fund Rank #1 (Strong Buy).
The fund has returned 20% year to date and has an annualized 3-year return of 17.2%. The fund carries an expense ratio of 0.80% as compared to category average of 1.28%.
JHFunds2 Real Estate Securities 1 (JIREX – MF report) seeks to provide long-term growth of capital as well as current income. The fund invests a large proportion of its assets in equity securities issued by real estate investment trusts and companies. Not more than 10% of its assets may be invested in foreign firms.
The fund carries a 3-year beta of 0.56 against standard index and currently holds a Zacks Mutual Fund Rank #2 (Buy).
The fund has returned 29.4% year to date and has an annualized 3-year return of 16.9%. The fund carries an expense ratio of 0.78% as compared to category average of 1.34%.
SSgA Clarion Real Estate N (SSREX – MF report) invests a minimum of 80% of its assets in real estate investment trusts (REITs). A maximum of 20% of the assets may be invested in non-REIT real estate securities and also in non-real estate companies. The fund may also invest in fixed-income securities and money market funds.
The fund carries a 3-year beta of 0.60 against standard index and currently holds a Zacks Mutual Fund Rank #1 (Strong Buy).
The fund has returned 29.2% year to date and has an annualized 3-year return of 16.9%. The fund carries an expense ratio of 1% as compared to category average of 1.34%.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.
