I understand why last year investors piled into the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), a low-volatility play on the S&P 500 Index. After all, Shakespeare would recognize 2011’s equity returns: full of sound and fury signifying nothing.
SPLV now has $1.56 billion in assets, but perhaps its moment has passed.
Equity volatility, as measured by the CBOE Volatility Index, continued its downtrend this week, with another big drop on Monday.
More broadly, a steady if unspectacular stream of positive economic indicators—most recently this week’s retail sales data—points to recovery, if not outright expansion.
If all this is true, is SPLV’s overshadowed sibling, the PowerShares S&P 500 High Beta Portfolio (NYSEArca: SPHB), due for its time in the sun? It’s worth a look. Here are returns since the market’s most recent nadir on Oct. 4 of last year:
SPHB has screamed back at 36.6 percent while SPLV has delivered 15.2 percent. I’ve got the SPDR S&P 500 (NYSEArca: SPY) in there too, splitting the difference at 24.3 percent, as you might expect from a beta-one fund
Looking further back to May 5, the inception date of both funds, returns are again widely dispersed, but with SPHB’s on the losing end.
The two ETFs diverged most dramatically three months after launch, when the August 2011 downgrade of U.S. Treasurys roiled markets. PSHB in particular nose-dived while SPLV merely dipped.
SPHB is still struggling to catch up to SPLV after this downturn, with returns since inception of -9.1 percent, while SPLV has gained 10.3 percent.
SPHB’s history of returns is too short to support rigorous regression, but visually it does indeed look like the fund delivers what it promises: high beta.
It’s worth noting that SPHB juices up returns without resorting to leverage. While leverage has its place, funds with double- or triple-exposure, or even inverse funds, can have undesirable side effects over longer periods, as my colleague Devin Riley made clear in a recent blog.
My biggest concern on SPHB isn’t about beta or leverage, but instead about the nature of its basket.
Two great funds duke it out on fees, but holding costs tell a different story.
By including factor tilts in smart beta’s definition, you get a mishmash of ETFs.
When ETF-friendly advisors give advice to prospects, it’s worth noting what they shouldn’t say.
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