Every Monday we feature “A Stock to Sell” as our daily post. With every stock or investment we recommend as a sell, we give you a full explanation of why we advise against investing in it at this time. Today we look at one of the new exchange-traded funds (ETFs) that deviate from the simple, low-cost premise of matching a broad index. For two Canadian ETFs we recommend that stick to that cost-effective premise, see this article.

BMO Low Volatility U.S. Equity ETF (symbol ZLU on Toronto; www.etfs.bmo.com) aims to invest in a portfolio of low-beta U.S. stocks. The fund has a 0.30% MER and yields 2.0%.

The ETF selects the 100 lowest-beta stocks from a universe of the largest, most liquid U.S. securities. The underlying portfolio is rebalanced in June and December. In this respect, it differs widely from conventional ETFs which are designed to minimize trading and trading expense.

BMO Low Volatility U.S. Equity ETF’s top holdings are Newmont Mining, McDonald’s, Autozone, Verizon Communications, Quest Diagnostics, Dollar General, Family Dollar, AT&T, Laboratory Corporation of America and AmerisourceBergen Corp.

Beta is a commonly used measure of volatility. To calculate it, you first assign an index like the S&P 500 a beta of 1.0, then measure the historical volatility of different stocks against the index.

If a stock has a beta of 1.0, it means the market and the stock move up or down together, at the same rate. That is, a 10% up or down move in the stock market index should theoretically result in a 10% up or down move in the stock. A beta of 2.0 implies the stock will tend to move twice as much as the market. If the market moves up 10%, the stock should move up 20%. A beta of 0.5 indicates the stock will move one-half as much as the market, either up or down.

A negative beta indicates the stock tends to move in the opposite direction from the general market. That is, the stock price declines when the overall market is rising or rises when the overall market is declining.

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Canadian ETFs: Beta makes a broad statement about volatility, but says very little about investment appeal

As a measure of risk, beta has a number of limitations. It is based on past data, so its use in predicting the future assumes the company in question remains unchanged—for instance, that no major acquisitions divestitures or other company-altering events take place. In reality, a stock’s beta can rise or fall over a period of years, or change abruptly.

Betas can mislead you in other ways. Gold stocks have an average beta of 0.42 when you use the S&P 500 Index as their benchmark. Such a low beta indicates gold stocks are safe investments, like utilities, but that’s incorrect. Their performance and returns have little to do with the performance and returns of the S&P 500 Index. They rise and fall with gold prices.

A stock’s beta makes a broad statement about its history of volatility. It says little if anything about its prospects or investment appeal.

To assess a company’s suitability for your portfolio, you are better off using fundamental measures of safety and quality, such as steady earnings and cash flow, low debt and a secure hold on a growing market.

TSI Network recommendation: SELL