Low-volatility ETFs have performed very well in 2013 on the strength of defensive sectors although the tide may be turning with cyclical stocks taking the lead recently.
Risk-averse investors and performance-chasers have been pumping money into PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) this year.
However, their “high-beta” mirror images could be poised to outperform in the second half of the year. [Mo’ Beta: Why Low-Volatility ETFs are Lagging]
The $279 million PowerShares S&P 500 High Beta Portfolio (NYSEArca: SPHB) is comprised of the 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past year.
Conversely, SPLV holds the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. [Have Low-Volatility ETFs Overstayed Their Welcome?]
SPHB, the high-beta fund, is tilted toward cyclical sectors such as technology, financials, energy, industrials and materials. [High-Beta or Low-Volatility ETFs?]
SPLV, the low-volatility ETF, focuses on defensive sectors such as consumer staples and utilities. These stable, dividend-paying sectors have led the way in 2013 but the trend may be reversing to favor cyclicals. In other words, defensive sectors may be overbought and overvalued. [Some Sector ETF Charts Pointing to a Cyclical Rotation]
Next page: ‘Rude awakening’
Ned Davis Research strategists point out that defensive sectors have substantial allocations in so-called safety funds, including low-volatility and dividend strategies.
The strategists note that if these sectors capitulate, “some ETF and mutual fund investors will be in for a rude awakening if they aren’t watching their underlying sector exposure,” reports Brendan Conway for Barron’s.
Of course, investors can simply use sector ETFs to position for a rotation to cyclicals. But high-beta funds could also make sense along with “momentum” ETFs such as SPDR S&P 1500 Momentum Tilt ETF (NYSEArca: MMTM) and iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM).
“MMTM could be thought of as an anti-low-volatility ETF,” said David Mazza, head of ETF investment strategy, Americas, for State Street Global Advisors.
The fund concentrates on U.S. stocks exhibiting price momentum.
Turning back to the high-beta ETF, the fund has been outperforming low-volatility strategies since mid-April, after lagging for much of the year.
The chart below shows the relative performance of SPHB versus SPLV.
