New Securities For Use as Tactical Portfolio Tools

There are investors who want either higher beta or lower volatility when they fine tune their domestic equity exposure. For these investors, PowerShares has come out with two ETFs that allow investors to harness either tactic. For bullish investors, who want high beta, there could be a problem in buying and holding enhanced ETFs over long periods of time - even when markets are going up. Because enhanced ETFs are structured to return an enhanced return on a daily basis, and markets almost never go up on a daily basis but rather go up and down within a major trend, daily market moves can erode performance over time. But these investors want a higher return than a market return. Because it focuses on high beta stocks, the PowerShares S&P 500 High Beta ETF SPHB is constructed to have greater overall volatility than the S&P 500, possibly performing better than the index. This could give the exposure that bullish investors want. Another type of investor is the ones who want to invest in stocks - and they will take some risk to get a return better than Treasuries or bonds - but do not want high levels of volatility. For these investors the PowerShares S&P Low Volatility ETF SPLV could be attractive. By holding stocks that have low volatility, it could perform relatively well in down markets, and is constructed for those investors looking to lower risk exposure. It is interesting to see the differences in the sector allocations of the S&P 500 Index and the high beta and low volatility indexes. These differences show which sectors have more volatility and which have less volatility. SPHB has the following sector allocation differences compared to the S&P 500 Index:
  • Consumer Discretionary, SPHB + 14 percent
  • Consumer Staples, - 10 percent
  • Energy, + 18 percent
  • Financials, + 20 percent
  • Health Care, - 9 percent
  • Technology, - 10 percent
  • Materials, + 6 percent
SPLV has the following sector allocation differences compared to the S&P 500 Index:
  • Consumer Staples, + 20 percent
  • Energy, - 10 percent
  • Financials, - 13 percent
  • Industrials, - 5 percent
  • Technology, - 16 percent
  • Utilities, + 26 percent
SPHB is selling at 11 times earnings, compared to the S&P 500, which is selling at 16 times earnings. This means that this high volatility can be bought at a discount, which would be beneficial in an up market. However, if the market declines, SPHB will probably decline more than the S&P 500 or SPLV, possibly more than offsetting its lower multiple advantage. Emerging Markets ("EM"). The rally in EM equities has flattened off with year-to-date gains of about 15 percent, and this flattening out is in my view is only a pause. The ample liquidity and attractive valuations conditions are still in place, and sentiment does not suggest an oversold or even an overly enthusiastic condition. There could be another 15 percent advance on the upside by year end. Some ETFs that offer representation for a further advance and seem reasonably appraised are EEM, PXH, and HAO. Disclosure: My clients and I own shares of EEM, PXH, SPHB, and HAO.
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