What Are High Beta Stocks and What Do They Mean for YOU?

From April 2025 to early October, a fund of the market's most volatile stocks more than doubled, and then it gave back 11% in three weeks. Those are high beta stocks, whose prices tend to move more than the overall market. Beta compares a stock's past price swings with a benchmark index, usually the S&P 500, which by definition has a beta of 1.0.

A stock with a beta above 1.0 has historically moved more than the market in both directions. For example, a stock with a beta of 1.5 has tended to rise about 15% when the market rises 10% and fall about 15% when the market falls 10%. In practice, "high beta" usually means a beta of about 1.3 to 1.5 or higher, though there's no official cutoff.

The technology sector, especially AI stocks, includes some of the highest beta stocks. The Invesco S&P 500 High Beta ETF (SPHB) holds stocks such as Moderna, Sandisk, Advanced Micro Devices, Micron Technology, Tesla, and Western Digital. Information technology makes up 51% of the fund.

The Invesco S&P 500 Low Volatility ETF (SPLV) looks very different. Its largest sectors are utilities (27%), financials (24%), real estate (17%), industrials (13%), and consumer staples (7%).

High beta stocks have climbed sharply since the April 2025 tariff selloff. From April 4, 2025 to October 5, 2026, SPHB gained 131% including dividends (total return), while the S&P 500 gained 56% and SPLV gained just 5%. SPHB was up about 30% for 2026 through October 5.

Then the direction changed. Since October 5, it appears some investors have been moving money out of tech and high beta stocks. From October 5 through October 26, SPHB fell 11% including dividends, while the S&P 500 dipped 1% and SPLV gained 6%. That's an 18 percentage point gap between SPHB and SPLV in three weeks.

For long-time holders, this drop has taken back only part of the gains since April 2025. The drop started on October 5, the first Monday of the fourth quarter.

Here are four possible reasons for the selloff.

1. Profit taking may be one reason, since investors often sell some of their winners to lock in gains. With the year ending soon, some investors may sell part of a position now and more in January 2027 to spread the taxes over two years. Consult your tax adviser before making trades for tax reasons.
2. Growing worries may be another, because investors have put up with a lot of financial and world-event stress over the past couple of years, and at some point that patience wears thin and people want to spread their money around. Current worries include the ongoing Iran war, high oil prices, the midterm elections, and inflation.
3. Higher interest rates and inflation may be a third. The 10-year Treasury yield climbed to about 5.3% in early October, its highest level since 2002, before easing to about 5.0% by October 23. Higher rates tend to hurt growth stocks the most, because more of their value depends on profits expected years from now. As we mentioned last week, import and export prices are rising, which could lead to higher prices in stores. Consumer spending makes up about 68% of U.S. GDP. When fuel and food cost more, people have less to spend on extras like travel and home improvements. High mortgage rates also mean fewer people can afford to buy a home, which keeps the housing market slow.
4. How stock prices compare with profits may be a fourth. Investors are often willing to pay high prices for stocks when they expect profits to grow fast. According to FactSet, S&P 500 earnings grew faster in the second quarter of 2026 than in any quarter since 2021. Now investors appear to be asking whether that pace can last. Not everyone is worried. Nvidia CEO Jensen Huang told Bloomberg's Emily Chang at an October 16 event in Berlin that "all of this is going to pass," referring to the recent selloff in AI stocks.

What does this mean for me?

In our view, it's normal for tech and high beta stocks to pull back after reaching all-time highs. Stock market rallies rarely last for years without a drop along the way. If nothing major changes in the economy or the industry, we think periods of decline can offer new buying opportunities and a chance to rebalance your portfolio.

We believe technology is where the most growth and innovation will come from. If AI keeps spreading across the economy, we believe the companies that can meet that demand stand to benefit most.

In the meantime, long-term investors in high beta stocks have two options to consider. The first is tax-loss harvesting, which means selling an investment at a loss to lower your taxes. If you bought a position recently and it's now worth less than you paid, you may be able to sell it, claim the loss, and buy a different stock or ETF in the same industry so you stay invested. Be aware of the wash-sale rule. It disallows the loss if you buy the same or a substantially identical investment within 30 days before or after the sale. Consult your tax adviser before making trades for tax reasons.

The second is adding to positions that have dropped, which lowers your average cost per share. Be selective about which stocks you keep or add to. Do your homework on each company and how likely it is to grow its revenue and profits. This is not a recommendation for any individual investor. Contact us to talk about your situation.

A fund that more than doubled then gave back 11% in three weeks, and both moves come with owning high beta stocks. What matters is whether your portfolio was designed for both. Give us a call, and we'll review your plan with you. As always, let us know your thoughts on this UPdate.