After reading one of my recent articles, a reader commented about the high beta that the Vanguard Long-Term Corporate Bond ETF (VCLT) carries. For those who may be unfamiliar with beta, essentially, it is a measure of stock’s volatility in relation to the market. By definition, the market is assigned a beta of 1.0 and individual stocks are ranked according to how much they deviate from the market. If a stock’s price moves more than market moves, it is said to have a beta greater than 1.0. If a stock’s price moves less than market moves, the stock is said to have a beta less than 1.0. High beta stocks are known to be riskier than low beta stocks, but they also provide a potential for higher returns than low beta stocks.
My reader’s comment was posted before the most recent market turn, following Mr. Bernanke’s comments regarding the upcoming cessation of QE; and as anyone can see, VCLT took quite a hit. According to Yahoo!Finance, VCLT’s current three year beta stands at 2.66, which means that, if the market moves down one percent, VCLT will move over twice the amount of the market’s move.
During the most recent rout, VCLT’s price moved from a high of $93.68 per share on 4/29/13 to Friday’s (i.e. 7/05/13) closing price of $81.36 — a decline of 13.15 percent. Using a similar time frame, if we look at VCLT’s mutual fund cousin, the Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX), we see that VWESX went from a high of $11.04 on 5/1/13 to a closing price of $9.64 on Friday, 7/5/13 — a 12.68 percent decline in price.
As I told my reader in my reply, I tend to favor ETF’s over mutual funds because of their stock-like trading style, and because of the ability to trade options around many of them; but, as this information shows, volatility (i.e. beta) can be much lower with mutual funds. So, for those of us who are not “traders” and would prefer to avoid volatility, mutual funds may offer better choices for investors, provided, of course, their betas are, in fact, lower than their alternatives.
Now, with that said, I must freely admit that I expected the spread between the numbers to be much greater when I first looked at the charts for VCLT and VWESX. As can be seen in the above charts, VWESX appears to have a much smoother trading pattern and, consequently, lower volatility. Nonetheless, VWESX’s volatility is still nearly one-half a percentage point (0.47) lower than VCLT.
For those who do not “trade volatility,” know this: Volatility is a trader’s life’s blood. Traders will use volatility to generate sizable returns in relatively short periods of time. For those who were astute — and quick — shorting the VCLT when it began its decent (whether directly or through Options strategies) would now be yielding some rather nice returns (depending upon one’s entry point, of course). So, for some, volatility in the marketplace is a welcomed sign.
So, what does all of this tell us? Ultimately, people need to know where their “style” and comfort levels lie when it comes to trading and/or investing. If the individual is a person who is comfortable with a faster pace, and who wants to be able to employ Options strategies, then sticking with stocks and/or ETFS would be the right choice. Otherwise, if the individual is a person who would prefer a much slower and steadier pace, and less of their time and attention to be dedicated to “watching market moves,” then mutual funds may be a better alternative.
Fortunately, for all of us, we have choices.
Notes: Charting data provided courtesy of StockCharts.com.
Disclosure: I own shares of (VCLT).
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