The U.S. economy is steadily improving and market observers expect improved company earnings. Consequently, investors may consider exchange traded funds that track high beta stocks for a more risk-on environment ahead.
“With the 10-year Treasury yield rising, the U.S. economy improving and expectation of stronger 2017 earnings from cyclical sectors, investors have recently been gravitating toward higher beta securities,” Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, said in a note.
For instance, the PowerShares S&P 500 High Beta Portolio (NYSEArca: SPHB) has almost doubled in assets under management since the end of September.
SPHB is the high beta equivalent of the wildly popular PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV). The High Beta Portfolio consists of the 100 stocks from the S&P 500 Index with the highest sensitivity to market movements, or beta, over the past 12 months, or the exact opposite of SPLV, which takes the 100 least volatile stocks from the benchmark.
While SPHB launched alongside SPLV, the high beta strategy has not been has popular as investors looked to diminish equity market risk, especially with the 2008 financial downturns still weighing on people’s mind.
However, with the economy and corporate earnings steadily improving, investors may turn to a high beta strategy to capitalize on continued growth. Through the high beta weighting methodology, SPHB leans toward a hefty 32.7% tilt toward the financial sector, along with 28.8% energy, 13.7% information technology and 7.4% consumer discretionary. According to Capital IQ estimates for 2017, S&P 500 energy earnings are projected to triple while financials and tech sector earnings should hit double-digit growth of about 13%.
In contrast, SPLV is overweight consumer staples and utilities, two sectors that are not included in SPHB’s underlying portfolio.
“Such sector exposure is positive in light of recent developments. The yield on the 10-year Treasury note has moved higher since the end of the third quarter to 1.8% from 1.6% and the Federal Reserve’s minutes indicate a near-term rate hike is likely,” Rosenbluth said. “Higher bond yields have caused, and could continue to cause, investors to rotate away from income-oriented sectors such as consumer staples and utilities.”
For more information on alternative index-based strategies, visit our smart beta category.
PowerShares S&P 500 High Beta Portolio