What About High Beta/Volatility ETFs?
Since March 2011, the PowerShares S&P 500 Low Volatility Portfolio (NYSE: SPLV) has become the benchmark against which all other volatility ETFs are measured. With $2.44 billion in assets under management, SPLV stands not only as one of the most successful ETFs to debut last year, but as a testament to the soaring popularity of these products.
Other low volatility ETFs have thrived as well. For example, the iShares MSCI USA Minimum Volatility Index Fund (NYSE: USMV) is just 11 months old and already has almost $368 million in AUM. The iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: USMV) is also 11 months old and has $398 million in AUM.
What about the counterparts to low volatility ETFs? Those being high volatility funds. The story with those products is remarkably different. Illustrating the struggles of high volatility and high beta ETFs is the fact that some of these funds have already disappeared.
Acknowledging that beta and volatility are two different things, here is a look at which ETFs that emphasize beta and volatility might thrive in QE3-induced risk on environment:
PowerShares S&P 500 High Beta Portfolio (NYSE: SPHB)
SPHB is the high beta answer to SPLV and this product done an admirable job of attracting assets with $113.5 million since its May 2011 debut. SPHB, which rebalances quarterly, is home to 99 S&P 500 stocks that have shown the highest beta over the past 12 months.
Given the emphasis on high beta, SPHB's sector weights will not surprise anyone with financials coming in at 34.6 percent and energy receiving an allocation of 23.6 percent. No stock receives an allocation above 1.57 percent. SPHB has a fair expense ratio at 0.25 percent, but it also has a problem. It has trailed the SPDR S&P 500 (NYSE: SPY) by 130 basis points this year. On the flip side, as risk appetite has increased over the past month, SPHB has offered double the returns of SPY.
PowerShares S&P Emerging Markets High Beta Portfolio (NYSE: EEHB)
Consider EEHB the high beta answer to EEMV and the emerging markets equivalent of SPHB. EEHB, which debuted in February, is arguably a case study in how investors view emerging markets. That is to say developing nations and the corresponding ETFs are already perceived to posses higher betas and volatility, so it may not be attractive to some to take on even more beta. Assuming that assessment is partially correct, it might be part of the reason why EEHB has only $2.2 million in AUM.
EEHB's high beta ways are somewhat deceiving because the fund allocates 32.2 percent of its weight to South Korea, a market that probably should be considered developed instead of emerging. Another 12.3 percent goes to Hong Kong and Taiwan. A frontier markets ETF this is not.
It is EEHB's high weights to financials, industrials and materials names that have plagued the fund since inception. That said, being fair is essential, and it must be noted EEHB is up 5.4 percent in the past month compared to a 3.5 percent gain for the Vanguard MSCI Emerging Markets ETF (NYSE: VWO).
PowerShares S&P International Developed High Beta Portfolio (NYSE: IDHB)
IDHB also debuted in February and like its emerging markets counterpart, EEHB, has also struggled to accumulate assets. Today, IDBH has just $2.3 million in AUM. Presumably, a large part of the reason for IDHB's AUM struggles is that global investors know that the U.S. has been the sturdiest developed market bet this year.
Aside from a scant allocation to Canada, IDHB focuses on Europe and that means higher volatility than one would get with SPY. France and Germany combine for over 21 percent of IDHB's weight, but that is more that Eurozone exposure is more than canceled out by a combined 25 percent allocation to Sweden and Norway.
IDHB's exposure to steady Nordic economies gives the ETF an under-appreciated feel. What cannot be glossed over is the fact that IDHB has surged 24.6 percent in the past three months. A 3.77 percent distribution yield and 0.25 percent expense ratio are not too shabby, either.
For more on volatility ETFs, click here.
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