Article #616) Our Portfolio Beta to the S&P 500 - Measuring Risk Exposure

Updated: Jun 19


VTS Community,


I've added a new graphic to the Volatility Dashboard section above that will be updated daily going forward. It's not technically a volatility metric but I think some people will find it useful to conceptualize the exposure of our portfolios vs the S&P 500, and placing it within the Volatility Dashboard section seems the best spot for it.


* I will go into more detail in future blogs on each of the values for the various positions because there will no doubt be questions on some of them. For example, why does a long VXX Put have a different Beta than VXX does? Or how do I arrive at the Beta of the Short VXX Puts within Vol Trend strategy? I'll break those down further in coming blogs, but I don't want this one to be too long.


Today is just an introduction to Beta.


Current Portfolio Beta : S&P 500




Beta is a measure of the volatility of a security in relation to another. Beta is a useful measure because it gives information on two factors, both direction and magnitude.


Direction:


Positive Beta values mean the two securities move in the same direction. As an example, the MDY has a positive Beta value because the MDY moves in the same direction as the S&P 500 on average in the long run. When SPX goes up, MDY typically goes up. When SPX goes down, MDY typically goes down as well.


Negative Beta values mean the two securities move in the opposite direction. For example, the VXX has a negative Beta value because VXX moves in the opposite direction as the S&P 500 on average in the long run. When SPX goes up, VXX typically goes down. When SPX goes down, VXX typically goes up.



Magnitude:


Beta values greater than 1 mean the security moves more than the underlying security on average in the long run. For example, MVV has a Beta greater than 1 because it is the leveraged version of the S&P 400 MidCap index and as such, will move much more than the 1x leveraged SPX.


Beta values less than 1 mean the security moves less than the underlying security on average in the long run. For example, the IEF has a Beta less than 1 because it moves far less day to day than the SPX does.



Example:


The MVV Beta to the S&P 500 is showing how much the MVV moves in relation to the SPX, and that value as of today is 2.02. Remember that value tells us two things:


- First, 2.02 is positive which means the MVV typically moves in the same direction as the SPX. On days where the SPX is up 1%, we would expect on average the MVV would be positive as well.


- Second, 2.02 is greater than 1 which means MVV typically moves more than the SPX. On days where the SPX is up 1%, we would expect on average the MVV would be up more than 1%.



So Beta is an extremely useful metric for everyone to become familiar with and I personally use it in several different applications within my investing. For this new chart it's showing the exposure of each of our portfolios vs the S&P 500.



Current Leveraged Total Portfolio Beta : S&P 500




Our strategies and the current positions are listed there with the corresponding Beta factor to the S&P 500. Since the markets are relatively stable right now and the Volatility Barometer is below 60%, we find the portfolio currently exposed in its highest range with all individual positions being aggressive. The total Beta : S&P 500 is 1.21 right now.


- The positive number means we are positively correlated to the S&P 500 right now. If the SPX goes up, our portfolio will typically increase in value. If SPX goes down, our portfolio should be expected to decline in value.


- The value greater than 1 means we have more than a 1:1 exposure to the S&P 500 right now. If SPX goes up, our portfolio will typically increase in value faster than the S&P 500. If SPX goes down, our portfolio should be expected to decline faster than the S&P 500.



Current Total Portfolio Solution Beta : S&P 500



The individual strategies will have the same directional exposure, but in the standard portfolio we don't use any leverage so the Total Portfolio Solution Beta : S&P 500 is lower in this case, currently at 0.70.


The positive number means we are directionally aligned with the SPX, but the value less than 1 means that our exposure isn't quite 1:1 and our portfolio should be expected to move a little less than the SPX.




Using Beta in this way gives us a snapshot into the current exposure of both of our portfolios. Now it's not an exact science day to day as true realized movements in the short term can deviate from long term beta factors, but it's the closest we can get to meaningful expectations of movement.


This is something that the vast majority of investors are completely in the dark about and don't get any updates or clarity on from their advisors. Most people don't even know what's in their portfolio let alone how it's expected to move vs the equity markets. However, since the VTS portfolios are quant based systematic strategies I can pull back the curtain so to speak and not only show exactly what's in the portfolio, but also show a detailed breakdown of how those positions are directionally exposed.