See also

• [[Living off Dividends] Retirement]
• my reply to Tanko on [[AT&T as cash cow]]

This blogpost is about a hot stock’s 1) correlation with broad market 2) volatility. Beta is a useful concept to capture them all.

High volatility stocks are harder to buy-n-forget , and tend to threaten my firewall.

— In a non-recessionary decline/correction, actual dividend amount will probably be stable among my dividend stocks. My firewall is easier to maintain.
— In a recession, high-yield businesses tend to have more robust profitability [1]. High-yield stock P/E tend to stay better than hot stocks on average. High-yield stocks tend to be more defensive and weather-proof. I maintain my firewall largely based on robust profitability. I have more confidence, more peace of mind.

The aristocrats and many other div-stocks refuse to cut dividend even in a recession 🙂

[1] A few hot stocks (MSFT, Oracle) are also robust

T:US is not “hot” by my definition.

— Why do I pit div stocks against hot stocks?
As explained in div stocks widely seen as low-growth #laughing, hot stocks by definition enjoy a price premium due to investor mind share. This price premium tends to depress CDY. Therefore, by my definition, hot_stocks vs div_stocks are almost mutex. (Note this doesn’t mean dividing my stocks into “female vs male”. )

My big positions are all dividend stocks. The relentless pressure from fellow investors stems from hot growth stocks. I have been struggling to incorporate hot stocks into my “system”.
— hot money … mostly hits hot stocks (far more than div stocks). This explains their high correlation with the broad market.

High beta (high volatility) vs high return .. are often indistinguishable.

Cryptocurrencies, commodity futures show the same feature.

— index stocks … are subject to hot money flow via ETFs. As ETF grows in popularity esp. among retail investors, I feel index stocks would get more volatile.
Why? See https://www.nber.org/digest/sep14/do-etfs-increase-stock-volatility (2014) and (2015) https://www.sec.gov/comments/s7-11-15/s71115-1.pdf. Surprisingly, a SP500 ETF is not exactly replicating the SP500 returns. It participates and amplifies that return.

Mufu? An index-tracking mufu would also increase volatility of the index stocks. As 40% new (hot) money comes in, fund manager has to move that amount from cash account to the “stocks account”. To maintain the current composition, she has to buy virtually all the existing names (like AAPL), thus increasing demand for AAPL. With a 30% redemption, she has to sell a huge chunk of her stocks (trying to maintain current composition), thus increasing selling pressure on AAPL.

Therefore, the more “popular” AA stock gets among fund houses, the higher its beta.

Suppose the AA business is under-performing. The company wishes to remain in SP500 (and other indices) because SP500 “club membership” would ensure a lot of blind (hot) demand for AA stocks. When overall market is flush with (hot) money, the index ETFs receive inflows, and passively buy AA according to AA’s weight in each index. In contrast, index-tracking mufu managers would actively evaluate AA and  may or may not buy it, but at least AA is on the radar. Once kicked out of all indices, AA would be under the radar.

As part of sp500 (and other indices) the demand for AA stocks is mostly driven by overall market, rather than AA  business fundamentals !

How about T:US (and other utility stocks)? An index stock, hit with hot money, but low beta.

Without analyzing the data, I guess over the last decades (and the next decades) index ETF has grown far more popular, which somewhat increases the volatility and return of the constituent stocks, which in turn attracts more hot money. Looks like a positive feedback loop. I think that increasingly, the only hope to match (or beat) SP500 involves trading volatile (growth) stocks or trading the same SP500 constituent stocks.

I guess ETFs mostly invest in popular stocks. Over the past decades, the steady increase in ETF participation probably leads to more concentration more gravitation towards the big index-component stocks.
As ETFs become increasingly popular vis-a-vis stock-picking, the popular stocks probably receive even more mindshare and volume than before.
These hot stocks probably become more volatile due to retail hot money.