While low volatility ETFs received plenty of adulation last year, data confirm high beta funds performed well, too. Just look at the case of the Salt High truBeta US Market (SLT).
SLT, “which targets large and mid-cap stocks expected to move more than the broader market. SLT returned 37.93% in 2019, outperforming the 31.49% calendar year return for the S&P 500,” according to Salt Financial.
SLT seeks to track the investment results of The Salt High truBeta US Market Index, which provides exposure to higher beta US stocks based on the truBeta forecasts of market sensitivity.
Traditional estimates of risk or beta are based on calculating long-term past performance such as through looking at a five-year period of monthly returns. On the other hand, Salt Financial looked at their patented truBeta methodology that incorporates more recent intraday data, multiple historical periods and a non-linear model to forecast beta over the next quarter.
Sizing Up SLT
SLT features exposure to seven of the 11 S&P 500 sectors and predictably eschews exposure to low volatility hall markets like consumer staples and utilities. Rather, the fund devotes more than half its weight to technology and financial services names.
A more responsive measure like truBeta can potentially reveal sources of market risk that are less apparent using more traditional measures of risk. Additionally, the juiced-up beta in these funds raises questions on exactly what an investor is paying for – is it stock picking or just over-loading the portfolio with beta to shoot for higher average returns? If it’s the latter, there are likely cheaper, index-based vehicles for targeting higher beta stocks for more aggressive portfolio allocations.
“In 2019, the High truBeta index outperformed the S&P 500 High Beta Index, a leading benchmark for high beta US stock exposure, by 359 basis points (38.03% vs. 34.44%, respectively),” according to Salt Financial.
By utilizing a more updated methodology, ETF investors may be better equipped to more accurately determine the amount of risk they are exposed to and potentially enhance their exposure to growth companies.
“We believe our approach helps investors better target risk in their portfolios,” said Alfred Eskandar, President and COO of Salt Financial. “With a beta of 1.44 to the S&P 500 in 2019, we’re pleased the fund met its mandate of providing higher sensitivity to the market.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.