If The Market Falls, Try These Low Beta ETFs
After two strong up days, stocks wilted into the close Thursday with selling pressure intensifying late in the day. Maybe it is a sign of things to come. Then again, maybe it isn't, but there are indications that this rally is getting tired.
Price retrenchment in junk bonds, disappointing performances from some emerging markets ETFs and strong inflows to low volatility funds could all be signs a pullback is imminent. Should that scenario materialize, investors will likely flock to low beta fare such as consumer staples and utilites stocks and ETFs.
The move to those sector ETFs is already underway. Remembering that beta is a measure of systematic risk for a security or a portfolio relative to the broader market, it also pays to note that some ETFs have surprisingly low betas. Those funds can prove useful (and durable) in the event of a market pullback.
SPDR S&P Pharmaceuticals ETF (NYSE: XPH) It is not surprising that an ETF tracking pharmaceuticals stocks makes a list of low beta funds. After all, pharma giants such as Johnson & Johnson (NYSE: JNJ) and Merkc (NYSE: MRK) each have betas of less than 0.6.
What is surprising about XPH having a beta of 0.87 against the S&P 500 is that this ETF is not heavy on the sector's blue-chip, conservative names. In fact Eli Lilly (NYSE: LLY), Pfizer (NYSE: PFE), Johnson & Johnson and Merck combine for less than 17 percent of the XPH's weight.
XPH does a good job of mixing those value names in with stocks with more of a growth feel such as Questcor (NASDAQ: QCOR) and Salix (NASDAQ: SLXP). The result is an ETF that is not as boring as standard pharma fare, but also one that is perhaps less volatile than a pure biotechnology fund. Bottom line: XPH has returned 33 percent in the past two years. Investors that want a low-beta pure pharma option should consider the Market Vectors Pharmaceuticals ETF (NYSE: PPH).
Guggenheim Frontier Markets ETF (NYSE: FRN) This one is sure to surprise to some investors. It might be logical to think frontier markets, which are riskier bets than emerging markets, would come with high betas. In reality, part of the case for investing in frontier markets is the historically low correlations to U.S. stocks found in this asset class.
FRN is not heavy on frontier markets as Chile and Colombia, both emerging markets, combine for over 58 percent of the ETF's weight. However, the ETF sports a beta of just 0.75. Additionally, FRN's standard deviation is 18.7 percent compared to 21.8 percent for MSCI Emerging Markets Index, according to Guggenheim data.
iShares MSCI Malaysia Index Fund (NYSE: EWM) An ETF for an emerging market in South East Asia with a beta that is just a fraction of that of the S&P 500? Some folks might be apt to laugh at the notion, but such a ETF does exist. EWM's beta against the S&P 500 is just 0.24 with a three-year standard deviation of 16.82 percent, according to iShares data.
Here is the near-term rub with EWM: The ETF has had some issues to deal with this year because of investor nervousness regarding Malaysia's upcoming elections. Those elections must be held by the end of April. Until then, only small positions should be used with EWM.
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