Checking In: A European Beta ETF (IDHB, EWD)
As the exchange-traded products industry has continued to evolve, one of the more interesting phenomenons has been the rise of volatility funds. These ETFs allow investors to dial down or ratchet up their exposure to highly volatile stocks.
Along with volatility funds, high and low beta ETFs have appeared on the scene. As traders should note, beta and volatility are two fundamentally different things. Beta measures a stock's risk relative to the broader market, while volatility is statistical measure of the dispersion of returns for a given security or index, according to Investopedia.
However, the current market environment is not rewarding high volatility or high beta positions. This may explain the struggles of at least one new ETF, the PowerShares S&P International Developed High Beta Portfolio (NYSE: IDHB).
The PowerShares S&P International Developed High Beta Portfolio came to market in February and has thus far only attracted about $2 million in assets under management. Home to almost 200 stocks, it should be noted that IDHB is cheap with an annual expense ratio of just 0.25%.
IDHB's high beta ways are easy to understand as the ETF's name gives itself way. This is an international fund, and while it offers no exposure to emerging markets, the ETF has a 3.6% allocation to Canada with the rest of IDBH's weight going to European nations. Sweden leads the way with an allocation of almost 18%. Those that doubt Sweden's status as a high beta market, should note the fact that the beta on the iShares MSCI Sweden Index Fund (NYSE: EWD) is 1.74.
Overall, about 31% of IDHB's weight is devoted to Scandinavian countries, which reduces the fund's Euro Zone exposure a bit, and that Scandinavian exposure could be profitable going forward.
On the other hand, about 38% of IDHB's weight goes to Euro Zone members and the ETF's 10.3% weight to Italy is not something to be bragging about at this point. A 10.9% allocation to France has the potential to be a near-term problem as well, as the Euro Zone's second-largest economy has been rumored to be a possible target for a credit rating downgrade.
In terms of individual holdings, IDHB focuses primarily on large and mid-caps with over 55% of the fund's weight going to large-cap growth and large-cap value names. Only a scant percentage of the fund's holdings are small-caps, but it is the sector composition that raises red flags.
The economic outlook for most Euro Zone nations is weak at best. Italy is in a recession and growth there is expected to contract this year. Additionally, Belgium, France and the Netherlands aren't going to wow anyone with their near-term economic outlooks and that provides a cautionary tale. IDHB has a 31% weight to financials, 20.3% allocation to industrials and a 14.5% concentration to consumer discretionary names. All high beta sectors are vulnerable as global investors speculate that the fate of the Euro Zone and the common currency remains grim.
Bottom line: IDHB, which has not traded in several weeks, is the prime example of an ETF that needs global macroeconomic factors to be working in its favor. That is not happening right now. If and when that time comes, global investors may want to back up the bus on the Europe, and IDHB could flourish. Predicting when that will happen is the tricky part.
For more on Europe ETFs, please see here.
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