An understanding of a fund's beta value could help you decide if that fund matches your risk tolerance
Understanding the potential volatility of your investments is important, because short-term performance swings can have a significant effect on long-term performance. When considering a mutual fund's historic volatility — measured as the fluctuation of its net asset value — some investors may find it difficult to make sense of the indicators that are available. Beta, a measure of the volatility of a fund's returns in relation to the market as a whole, is one such measurement. But beta measurements don't have to be mysterious. The following guidelines will help you understand how they are used by mutual fund investors.
Let's begin with the range of possible beta values. For most funds, the beta value usually lies somewhere between 0.0 and 2.0, and is interpreted based on how much it deviates from a value of 1.0. That's because a beta of 1.0 indicates that the fund is expected to move in tandem with (or nearly identically to) the market. However, if a fund's beta value is more than 1.0, it is typically expected to fluctuate more than the market. Let's say a mutual fund has a beta of 1.2, for example. This beta value tells us that the fund's net asset value is expected to change about 20% more than the market. For example, if the market advances by 5%, the fund would be expected to move ahead by 6%, and the relationship would be the same if the market moved in the opposite direction: A market decline of 5% would lead us to expect the fund to decline by 6% (again, based on its historical beta of 1.2).
A beta value less than 1.0, meanwhile, indicates that the fund is expected to be less volatile than the market. For example, if a fund's beta is 0.4, it would be expected to capture 40% of gains posted by an advancing market. But in a declining market, the same fund would be expected to fall back by 40% of the market's setback. So keep in mind that as a beta value drifts away from 1.0, whether in a positive or negative direction, the fund's performance is expected to drift from the market in a similar proportion. Just as importantly, keep in mind that beta tells us about historical performance and therefore may not be perfectly predictive of a fund's future correlation to the broader market. Since the beta calculation is based on past performance, we can't expect it to tell us precisely how a fund will behave in the future.
A word about "markets"
When calculating a fund's beta, "the market" is defined as the securities index that the fund is measured against. A fund that invests in emerging markets, for instance, may have beta values that are calculated relative to the MSCI Emerging Markets Index. This index would be considered representative of the market, and would carry a beta of 1.00.
Beta values at a glance
| Beta |
Volatility |
| Beta between 0 and 1 |
Low volatility, with fluctuations in smaller proportions than those of the fund's index. These funds are typically more appropriate for investors with a low-to-moderate risk tolerance. |
| Beta = 1 |
Volatility that is in line with the fund's index, with fluctuations that match those of the index |
| Beta > 1 |
The fund's volatility is higher than that of the index, with fluctuations that are in higher proportion than those of the fund's index. These funds are usually more appropriate for investors with a higher risk tolerance. |
Note: While beta values can help with comparisons of multiple funds that have the same benchmark, they can be less useful when comparing funds that use different benchmarks. That's because different indices do not always exhibit the same volatility. An index that tracks large-cap stocks, for example, can exhibit a different volatility than that of an index that tracks small-cap stocks.
Important Information
Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.
Carefully consider a Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus, which may be obtained by clicking here or calling 800 523-1918. Investors should read the prospectus carefully before investing.
The MSCI Emerging Markets Index measures equity market performance across emerging market countries world-wide. An index is unmanaged. You cannot invest in an index.
International investments are subject to risks not ordinarily associated with U.S. investments including capital loss from unfavorable fluctuation in currency values, differences in generally accepted accounting principles, or economic or political instability in other nations.
Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
This article is for informational purposes only and is not meant to predict actual results. Information in this article should not be construed as financial advice.
The Funds are distributed by Delaware Distributors, L.P., an affiliate of DMHI, and MGL.
(4605) July 2009
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