Buy These High Beta ETFs For a Santa Claus Rally

Zacks

The U.S. equity market continued its strong rally this year, thanks mainly to the Fed's easy money polices. Decent Q3 earnings growth and a string of robust U.S. data of late, signaling speedy economic growth, further supported the bullish trend.
 
Solid Data
 
The U.S. GDP growth for the third quarter was revised up to 3.6% from 2.8% reported earlier, well above the 2% expectation in a survey of economists by Bloomberg News and 2.5% growth in the second quarter. The labor market is also improving gradually as the number of jobless claims fell for the week ending November 30 fell to 298,000---lowest since the first week of September.
 
Additionally, rising home-building permits and new construction plans are injecting optimism into the recovering housing market and the overall economy amid rising mortgage rates. Building permits for new homes increased from 5.2% in September to 6.2% in October, reaching the highest level in five years. This suggests an increase in hiring, leading to a healthier job market in the coming months (read: 3 Homebuilder ETFs Leading the Pack this Earnings Season). 
 
Further, China’s new economic reform plans and improving European conditions supported the broad rally. The slew of solid data reignited the speculation that the Fed could scale back its monetary stimulus some time soon. However, the Fed is seeking to keep interest rates near the zero level, even if tapering starts, until unemployment hits 6.5% and inflation stays under 2.5%.
 
While the job picture looks brighter, consumer sentiment seems to be fading. U.S. consumer confidence continued to slide in November following the October plunge. This is especially true given that the Consumer Confidence Index, measured by the Conference Board, dropped to a seven-month low to 70.4 in November from a revised 72.4 in October.
 
Is Santa Claus Rally Coming to Market?
 
The S&P 500 has rallied 27% so far this year, representing the biggest annual gain in more than a decade. This bull trend will likely continue this month if history is any guide (read: 3 Sector ETFs Crushing the Market in 2013).
 
December has a proven track record of being the best performing month for the S&P 500 due to a Santa Claus Rally. Over the past 50 years, the S&P 500 benchmark gained 1.9% on average in December and based on this, we expect continued uptrend in the stock market.
 
How to Play
 
Based on seasonal trends, bullish outlook and improving fundamentals, investors should take a look at the following two high beta ETFs likely to ride on the surging stock market.
 
Notably, high beta funds tend to rise or fall more than the stock market and are thus more volatile. When markets soar, the high beta funds experience larger gains than the broader market counterparts and thus, outpace their rivals (see: all Large Cap ETFs here).
 
PowerShares S&P 500 High Beta Portfolio (SPHB)
 
This fund tracks the performance of 100 stocks from the S&P 500 Index with the highest realized volatility over the past 12 months. It has amassed $552.2 million in its asset base and trades in good volume of more than 134,000 shares a day. The ETF charges 0.25% in expense ratio.
 
The product is widely spread out across each security as none of them holds more than 1.4% of total assets. PulteGroup (PHM), Vertex Pharmaceuticals (VRTX) and Genworth Financial (GNW) occupy the top three positions in the basket. The fund puts more focus on large caps as these account for 60% share while mid caps take the remainder. Nearly 60% of the portfolio is tilted toward value stocks (read: 3 Ultra Cheap ETFs for Value Investors).
 
From a sector look, financials take the top spot with one-fourth share in the portfolio, closely followed by energy (18.26%) and consumer discretionary (16.29%). SPHB had a strong run this year, gaining 34.5% so far. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘High’ risk outlook.
 
PowerShares S&P International Developed High Beta Portfolio (IDHB)
 
This ETF targets high beta securities in the developed markets, excluding the U.S. The fund seeks to measure the performance of 199 stocks from the S&P Developed ex US and South Korea LargeMid Cap BMI Index with the highest realized volatility over the trailing 12 months.
 
The fund is unpopular and illiquid as depicted by its AUM of $5.8 million and average daily volume of under 8,000 shares. The product charges 25 bps in annual fees from investors. Like its U.S. counterpart, the ETF maintains a good balance between securities as each hold less than 1.1% of assets.
 
IDHB is skewed toward the large cap securities at 72% while mid cap accounts for 26% share. The fund is well spread across style box with a nice mixture of growth, value and blend securities. Here again, financials dominate the fund’s return at 36% while industrials and materials round off to the next two spots (read: Top Ranked Financial ETF in Focus: VFH). The fund returned nearly 15.5% in the year-to-date time frame.
 
Bottom Line
 
Given the current bullish fundamentals, both products could be a winning strategy this month for risk tolerant investors. This is because funds with high beta stocks will often exhibit greater levels of volatility and usually return more when the market is surging.
 
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