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Mo’ Beta: Why Low-Volatility ETFs are Lagging


Low-volatility ETFs have been extremely popular with risk-averse investors but their flashier siblings known as “high-beta” funds have been beating the market in 2013.

PowerShares S&P 500 High Beta (SPHB) is up 20.5% the past three months. Meanwhile, PowerShares S&P 500 Low Volatility (SPLV) has gained 9.1% over the same period, while SPDR S&P 500 (SPY) has delivered a total return of 10.9%, according to Morningstar data. [Low-Volatility ETFs are ‘The New Black’]

Low-volatility and high-beta ETFs take polar opposite approaches.

SPHB, the high-beta fund, tracks the 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past 12 months. Beta is a measure of how closely correlated a stock’s returns are to that of the market. The market has a beta of 1.0, and stocks with a beta of more than 1.0 are more volatile than the market.

Conversely, SPLV consists of the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months

The high-beta fund’s recent outperformance is due to several factors.

First, Morningstar classifies SPHB as a mid-cap ETF, and this segment has performed well recently.

Also, the more cyclical sectors of the market have been leading the way during the “risk-on” rally.

Not surprisingly, the low-volatility and high-beta ETFs have radically different sector allocations.

SPLV, the low-volatility ETF, focuses on traditionally defensive sectors. It has 24% in consumer staples and 31% in utilities.

Meanwhile, SPHB has relatively higher stakes in more aggressive, cyclical sectors. The high-beta fund has 25% in financials, 21% in information technology, 13% in consumer discretionary and 19% in energy.

PowerShares S&P 500 High Beta


Full disclosure: Tom Lydon’s clients own SPY.

The opinions and forecasts expressed herein are solely those of John Spence, 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.