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The Other Side of Volatility ETFs


When it comes to equity-based volatility exchange traded funds, it is the “low vol” variety that command most of the attention and assets.

The PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the iShares MSCI USA Minimum Volatility ETF (USMV) have over $6 billion in assets under management combined. Standing alone, each of those funds has more assets than all of the high beta equity ETFs on the market today. [Learning to Love Low Vol ETFs Again]

Some strategists opt for tactical approaches that exploit the advantages of both low and high beta ETFs.

Utah-based Lunt Capital runs a strategy using volatility ETFs that aims to “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. As of the beginning of February 2014, the strategy had relatively high exposure to the U.S., relatively low exposure to emerging markets, and neutral exposure to developed international markets,” according to S&P Capital IQ.

This month, Lunt sold its position in the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV) to move into EELV’s high beta cousin, the PowerShares S&P Emerging Markets High Beta Portfolio (EEHB) . While the combination of high beta and emerging markets sounds downright toxic in the current environment, EEHB has traded high this year while EELV and the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) are in the red. [Some EM ETFs Stand Strong]

EEHB, which S&P Capital rates marketweight, has been supported by a better than 19% combined weight to Indonesia and the Philippines, two of this year’s top-performing developing equity markets. [Good News for Some of Asia's Best ETFs]

The PowerShares S&P 500 High Beta Portolio (SPHB) “has been part of the Lunt strategy since early 2013, when it replaced SPLV. SPHB also currently has high stakes in Financials stocks, but also in Energy and Consumer Discretionary,” according to S&P Capital IQ.

SPHB, which S&P Capital IQ rates overweight, does not command the attention that SPLV does, but the former has nearly $553 million in assets. SPHB has outperformed SPLV and USMV this year.

The other high beta play is the PowerShares S&P International Developed High Beta Portfolio (IDHB) , rated marketweight by S&P Capital IQ. Although IDHB is framed as a more exciting version of a plain vanilla developed markets ETF, it is not excessively risky at the country level as Japan, Sweden, the U.K. and Germany combine for nearly two-thirds of the ETF’s weight.

IDHB’s elevated beta comes by virtue of its combined 57% weight to financial services and materials stocks. The ETF is up nearly 5% this year.

PowerShares S&P International Developed High Beta Portfolio