Have it Both Ways With Volatility ETFs

ETF Trends

Many investors have embraced low volatility exchange traded funds. Case and point: The PowerShares S&P 500 Low Volatility Portfolio (SPLV) is just over three years old and is a $4.53 billion fund.

While SPLV and the rival iShares MSCI USA Minimum Volatility ETF (USMV) have established loyal followings, higher beta equivalents often go overlooked. However, some ETF strategists, including Lunt Capital, tactically use both low and high beta ETFs.

“Lunt’s tactical approach involves two primary steps. The general aim is to have one-third of assets in U.S. equities, one-third in developed international equities, and one-third in emerging markets. However, on a quarterly basis, Lunt tilts the strategy toward a favored geography and away from a least favored one. Since the beginning of April 2014, the strategy had relatively high exposure to the U.S., relatively low exposure to developed international markets, and neutral exposure to emerging markets,” said S&P Capital IQ in a new research note.

Lunt evaluates its emphasis on low or high beta ETFs on a monthly basis. For example, the strategist sold its stake in the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) to move into PowerShares S&P Emerging Markets High Beta Portfolio (EEHB) . EEHB is rated overweight by S&P Capital IQ. [An EM ETF for Risk Tolerant Investors]

EEHB is true to its high beta roots as South Africa, China and Turkey combine for over 49% of the ETF’s country weight. Conversely, the ETF features just a 5.4% allocation to South Korea and no exposure to Taiwan. South Korea and Taiwan are two of the lowest beta emerging markets.

Elevated beta, particularly with developing world stocks, cuts both ways and that has been seen with EEHB. As emerging markets stocks struggled last year, the ETF tumbled 16%, delivering a performance that was more than twice as bad as the MSCI Emerging Markets Index. With emerging markets ETFs back in style this year, EEHB is up more than 21%. [The Other Side of Volatility ETFs]

Lunt is taking a similar approach to U.S. equities, having sold its position in SPLV last month in favor of the $298.6 million PowerShares S&P 500 High Beta Portolio (SPHB) . S&P Capital IQ rates SPHB marketweight.

SPHB does not allocate more than 1.63% of its weight to any of its 98 holdings, but the ETF does not skimp on higher beta sectors. Consumer discretionary and financials combine for almost 47% of the fund’s weight.

Additionally, SPHB’s 11.7% allocation to health care stocks is anything but docile as seven of the 10 names from that sector owned by the fund are biotech stocks.

“Overall, the stocks that make up SPHB are considered undervalued according to S&P Capital IQ research though, not surprisingly, have elevated risk profiles. The ETF also ranks favorably to S&P Capital IQ for its low expense ratio and tight bid/ask spread,” said S&P Capital IQ. [Understanding Smart Beta ETFs]

SPHB has outpaced the S&P 500 this year by about 200 basis points.

PowerShares S&P 500 High Beta Portfolio

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