This morning, PowerShares launched two new high-beta ETFs:the PowerShares S'P Emerging Markets High Beta Portfolio (NYSEArca:EEHB - News) and the PowerShares S'P International Developed High Beta Portfolio (NYSEArca:IDHB - News).
Despite the slew of factor ETFs out there, these are the first that deliberately focus on riskier assets abroad in the chase for higher returns.
They both select and weight stocks on the basis of their beta, or sensitivity to market movements, over the past year. A stock’s beta essentially functions as its multiplier of market returns. All other factors held constant, if the market returns 1 percent, a stock with a beta of 2 would be expected to return 2 percent.
Of course, the opposite holds true as well—if the market falls by 1 percent, that same stock would be expected to fall by 2 percent.
What exactly is the market? EEHB defines its market as the S'P Emerging BMI Plus LargeMid Cap Index that it pulls its constituents from. Similarly, IDHB defines its market as the S'P Developed ex. US and South Korea LargeMid Cap BMI Index.
The high-beta screen and weighting scheme mean that EEHB and IDHB differ significantly from the broad emerging and developing market indexes. A look at each ETF’s country and sector allocations compared to comparable broad market ETFs confirms this intuition.
In the emerging space, I’ve compared EEHB to the SPDR S'P Emerging Markets ETF (NYSEArca:GMM - News), which tracks the S'P Emerging BMI Index. A notable difference between the two funds, before even considering beta, is that the S'P BMI Emerging Markets High Beta Index includes South Korea, while the S'P Emerging BMI Index doesn’t.
The table below shows the top countries in EEHB. You’ll notice that while EEHB’s 32 percent allocation to South Korea certainly skews it away from GMM, it doesn’t explain its over-allocation to Hong Kong.
Table 1. Top Country Weights – EEHB vs. GMM
EEHB is also significantly overweight in industrials and materials.
Table 2. Sector Weights – EEHB vs. GMM
The developed ETFs are also very different, in surprising ways. I’ve compared IDHB to the SPDR S'P World ex-US ETF (NYSEArca:GWL - News), which is based on the S'P Developed ex. US BMI Index.
The difference between IDHB begins with its top country allocations:It overweights Sweden, as well as Italy, Norway, and Greece. Italy and Greece are unsurprising—after all, they’ve been driving much of the world market’s returns, so it makes sense that they would react strongly to their own bad news.
However, I’m not quite sure where Sweden and Norway are coming from. In addition, notable absences from IDHB’s top country allocations include Japan, which has an 18.4 percent weight in GWL; Canada, with a 10.15 percent weight in GWL; and Australia, with a 7.5 percent weight.
Table 3. Top Country Weights – IDHB vs. GWL
The sector allocations are also very different—health care and telecom are missing from IDHB, though they make up 13 percent of GWL. IDHB also overweights financials, industrials, and materials.
Table 4. Sector Weights – IDHB vs. GWL
If you think that the markets abroad are about to rally and want access to the most market-sensitive stocks, EEHB and IDHB are surprisingly inexpensive—EEHB costs 0.29 percent a year and IDHB is 0.25 percent. Both have fee waivers in place through April 20, 2013 to hold their expense ratios at current levels. In comparison, you’ll pay 0.59 percent for GMM or 0.34 percent for GWL.
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The choice of either fund is definitely bold, but, if you’re correct , they’d both have huge rewards.