Downside Beta and Upside Beta: REITs Have Generally Protected Against Stock Market Declines
January 10, 2019 | Brad Case | Nareit
Early January 2019 has seen a continuation of the stock market turmoil that dominated December 2018: the Russell 3000 dropped by 1.5 percent or more on nine separate days and showed smaller declines on four other days. I have been particularly worried about tech stocks, and they certainly led the market’s turmoil with the S&P Information Technology sector index plummeting on the same nine days by an average of three percentage points per day, with daily declines as bad as 5.03 percent and never less than 1.88 percent.
REITs have generally provided a solid bulwark against stock market declines, with both a low correlation (typically about 60 percent when measured using monthly returns) and a low beta (typically about 0.6, also based on monthly returns) to the broad stock market. Many investors, though, are especially curious about downside beta and upside beta, which measure how a group of investments perform while the broad stock market is losing or gaining. In particular, downside beta and upside beta measure, respectively, how strongly REITs joined in a broad stock market decline or rally: a beta greater than one shows that REITs tended to move in the same direction but even more strongly, whereas a (positive) beta less than one shows that REITs tended to move in the same direction but not as strongly.
The big reason to focus on downside beta and upside beta (collectively called semi-betas) is that ideal investment return attributes will enable you to have it both ways: when the broad market is declining you would like investments that insulate your portfolio (downside beta <1), but when the broad market is increasing you would like investments that magnify the gains (upside beta >1). More generally, you want investments with favorably asymmetric semi-betas—that is, where upside beta is greater than downside beta.
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