Mo’ Beta: Why Low-Volatility ETFs are Lagging
February 25th, 2013 at 10:19am by John Spence
Low-volatility ETFs have been extremely popular with risk-averse investors but their flashier siblings known as “high-beta” funds have been beating the market in 2013.
PowerShares S&P 500 High Beta (NYSEArca: SPHB) is up 20.5% the past three months. Meanwhile, PowerShares S&P 500 Low Volatility (NYSEArca: SPLV) has gained 9.1% over the same period, while SPDR S&P 500 (NYSEArca: SPY) has delivered a total return of 10.9%, according to Morningstar data. [Low-Volatility ETFs are ‘The New Black’]
Low-volatility and high-beta ETFs take polar opposite approaches.
SPHB, the high-beta fund, tracks the 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past 12 months. Beta is a measure of how closely correlated a stock’s returns are to that of the market. The market has a beta of 1.0, and stocks with a beta of more than 1.0 are more volatile than the market.
Conversely, SPLV consists of the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months
The high-beta fund’s recent outperformance is due to several factors.
First, Morningstar classifies SPHB as a mid-cap ETF, and this segment has performed well recently.
Also, the more cyclical sectors of the market have been leading the way during the “risk-on” rally.
Not surprisingly, the low-volatility and high-beta ETFs have radically different sector allocations.
SPLV, the low-volatility ETF, focuses on traditionally defensive sectors. It has 24% in consumer staples and 31% in utilities.
Meanwhile, SPHB has relatively higher stakes in more aggressive, cyclical sectors. The high-beta fund has 25% in financials, 21% in information technology, 13% in consumer discretionary and 19% in energy.
PowerShares S&P 500 High Beta
Full disclosure: Tom Lydon’s clients own SPY.
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