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High-Yield Low-Beta Treasure Hunt

February 12, 2016
Stock market investing and the high yield low beta treasure hunt.
Vasilyev Alexandr from Shutterstock

This market is pretty confusing, right? Even the most seasoned traders are struggling to find confidence in which direction we are headed. One thing I noticed in the results from our last TD Ameritrade Investor Movement Index® is that when the markets are dropping, our retail investors tend to buy. Doesn’t that just smack in the face of everything you probably have heard about retail in the past? The fancy guys in the suits on TV always tell us that retail buys at the top and sell at the bottom.

But what we have noticed is that our retail clients are making a move to look for stocks that are higher yield and lower beta. This is often referred to as “rotating into safety”. Sounds easy, right? On the surface, yes. But there are a few things you might not be aware of.

Let’s start with beta. I think it’s fair to say our thinkorswim® platform team is the thought leader for all things volatility. We’ve built out tons of capabilities that allow users to view, skew, slice, dice, chart, and heart volatility any way they like. We are the Waffle House of Volatility. But when it comes to beta, there’s something that we always struggled with. It’s kind of a problematic data point if you are active in the market. Beta is the correlated historical volatility of an asset compared to that of the overall market. Simply put, beta describes how much a stock might move if an index (typically the S&P 500) changes 1%. So if a stock has a beta of 1.25, it would likely move up 1.25% if the market moved up 1%.

But here’s the problem. Beta is calculated using a statistical regression between the percent change in the stock and the percent change in the S&P 500 over a five-year period. This next part is important: all periods are equally weighted. Think about that. When you look at the beta of a stock today, it’s still strongly factoring in unprecedented events like market corrections, even though conditions have changed. Why? Because all 5 years of historical price performance are equally weighted.

That’s like me bragging about how thin I was five years ago. Who cares? What matters is what I look like today.

Let’s take, for instance, a stock like Activision Blizzard (ATVI) who is expected to report earnings after the close on 2/11. They have a traditional beta of 0.92. So most investors would assume that this stock is less volatile than the broad market as the market has a beta of 1. What you might not realize is that ATVI has actually been significantly more volatile than it was in the past. We believe that when you are looking at beta, you need a way to solve for recency in the calculation. So we came up with a new calculation which would only look at one year of pricing data and more heavily weights recent price movements as opposed to older ones. This new Beta calculation on ATVI is 1.25. We call this Fast Beta® and we think it’s a more sophisticated lens to use.

So where do you find it? Only on thinkorswim, naturally.

Fast Beta and Market Maker


Fast Beta and Market Maker Move in thinkorswim. For illustrative purposes only. Past performance does not guarantee future results.

On the lower right side of your stock quote on the Trade Tab, you’ll see the word “Beta” along with a lightning bolt. You can click the lightning bolt to select whether you want your beta fast or slow.

The other data point I have called out is Market Maker Move™. It’s worth noting that according to the options data, this is a calculation which essentially sums up the market’s collective thoughts as to how much a stock might move and expresses in a numerical term that traders can quantify. In the case of ATVI, the market anticipates that the stock will move up or down somewhere around $2.32 post earnings announcement. Just thought I would throw that out there as this stock has earnings on the 11th. You can read more about Market Maker Move from my prior post on the topic.

Now let’s talk high yield. You can easily seek out high yield stocks through the thinkorswim stock hacker. Maybe you are looking for a stock that trades over 1 million shares a day with a yield of between 2% and 10%. Maybe you want to steer clear of anything with earnings over the course of the next 30 days because earnings can sometimes throw a major wrench in a longer duration trade you are consider. Perhaps you want to filter for a PE of a certain level. Basically anything you want to scan for, you can. But what I like to do in markets that seem uncertain is to customize my columns in the scanner returns so I can look at a side by side comparison of yield vs. beta vs. fast beta.


High yield scanner results from thinkorswim. For illustrative purposes only. Past performance does not guarantee future results.

By sorting by yield for fast beta, it helps me better understand at a glance how volatile these high yield stocks are compared to the broad markets.

Having the right tools can really help you to save some time in your high yield, low beta treasure hunt.

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