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SPHB Vs. SPLV—Which Beta Is Smarter?

Paul Britt


Almost exactly a year ago, I blogged that markets could be poised for recovery and that a high-beta play would likely leave a low-volatility vehicle in the dust.

I got it half right. I’m happy to report that one year later almost to the day, the S'P is testing new highs.

But the vehicle I recommended to play this gain was a bit of a clunker; namely, the PowerShares S'P 500 High Beta ETF (NYSEArca:SPHB).

I opined that a high-beta SPHB would beat the wildly popular PowerShares S'P 500 Low Volatility (NYSEArca:SPLV) if the market went up.

The tale of the tape proves me wrong. Emphatically.

Here’s a chart of total net asset value for the past 12 months (March 14, 2012 through March 13, 2013, Bloomberg data).

I’ve also got the SPDR S'P 500 (NYSEArca:SPY) in there to represent the market.


1-Yr no SSO


The market is up 13.9 percent in the last 12 months. But SPHB is up only 11.1 percent, with huge volatility to boot. Meanwhile, SPLV, the mild-mannered low-vol fund, turned in a nice steady rise of 17.6 percent in the period.

I realize that the market as represented by SPY didn’t trend positive over the whole period. It bottomed at -7.9 percent in early June 2012. But SPHB plumbed far greater depths:-20.8 percent. And SPLV’s low point? Just -1.3 percent.

Sector biases help explain these differences. SPHB’s bias toward energy and financials helped to pull it down in June 2012, while SPLV’s preference for utilities and consumer staples contributed to steady, positive returns.

What’s more interesting to me is the shiny rearview mirror. I had the market call right a year ago but chose the wrong ride.

So, how would a simple double-exposure 2x leveraged fund have done?


Yes, levered. While geared funds often evoke fear and loathing, the fact is that a 2x fund like the ProShares Ultra S'P500 ETF (NYSEArca:SSO) beat SPHB’s high-beta play for the period.


1 Yr With SSO


SSO’s relationship to SPY is a lot more intuitive than that of SPHB. Sure, the levered fund gave a wild ride, but it didn’t dip down as far as SPHB. What’s more, SSO provided strong upside when the market trended positive while SPHB wallowed.

Experts on geared funds likely wouldn’t recommend holding SSO for a year without rebalancing, but the point is that a simple geared product provided a better high beta play than SPHB for the period, despite the June 2012 dip.

Here are some quick snapshots of other periods, starting with a view from inception—May 4, 2011—of SPHB and SPLV.


Since Inception With SSO


Again, SPHB lagged, while the double-exposure SSO and steady-Eddy SPLV excelled.

Only when I chose a market nadir of Oct. 3, 2011—a date I referenced in my blog a year ago —does SPHB beat both SPY (by 15.2 percentage points) and SPLV (by 24.4 percentage points). Still, it lags the double-exposure SSO by a whopping 41.3 percentage points.


Since 10.3.2011 With SSO


Those with strong sector views that coincide with SPHB’s sector allocations might find it appealing as a one-stop sector play.

But as a broad strategy for someone with sector-agnostic bullish views, SPHB is harder to recommend considering its recent performance next to its mild-mannered sibling, SPLV.

So I eat crow, with a side of humble pie. It turns out that getting it half right looks a lot like getting it wrong.

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at pbritt@indexuniverse.com .


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