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

high-volatility-etf

Full disclosure: Tom Lydon’s clients own SPY.

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