No Time For SPHB, Paul

March 15, 2012

Related ETFs

Ticker Fund name
SPHBPowerShares S&P 500 High Beta
Related ETF Lists
Large Cap ETFs

Sorry Paul, but your call to arms for SPHB left me shaking my head.

The only thing mounting is my skepticism of this “recovery” and, as far as that goes, offensive plays like the PowerShares S&P High Beta Portfolio (NYSEArca: SPHB) may be a way to get left in the red, let alone left behind.

I understand the temptation to anoint this economy on the right track and therefore load up on higher-risk/higher-reward strategies, but much of the “positive” data my colleague pointed to is anything but.

The retail sales data people are so giddy about? Well two-thirds of the growth came from rising gasoline prices and auto sales, with the remainder of the increase coming from food and clothing.

General merchandise actually declined 0.1 percent last month, pointing to the fragility of the consumer and the increasing portion of disposable income being spent on necessities.

In fact, the lazy analysis of headline numbers is the exact type of mistake that can lead to investors jumping head over heels into the wrong funds and abandoning defensive strategies at the worst possible time.

In many ways, my colleague’s assertion that the time is right for higher beta plays on the market at a time when volatility has plunged and indexes sit at multiyear highs is the exact time of dangerous front-running that can crush investors.

Let’s not forget Europe’s debt quagmire, which had many people less than six months ago predicting the end of the world as we know it. People may think it was “solved” with little more than a band-aid disguised as a swap agreement.

But I ask you, as European funding challenges resurface—as they inevitably will—is a high-beta or high-volatility fund really the place to be?

I could see making the case for high-beta funds like SPHB back in October when volatility was peaking. But now? The margin of error has closed considerably. Prices are high, valuations are elevated and sentiment is roundly bullish.

What happens if the market gets spooked by Europe like it did between July and October last year? What if inflation—the elephant in the room even in the midst of the latest Fed optimism—starts to drag on U.S. economic data?

Look no further than the performance of the low-volatility, high-beta and straight S&P 500 funds during the fall.

SPLV vs SPHB vs SPY Performance: July - Sept, 2011

You could be facing massive losses that can take years to claw back. With 36 percent of SPHB’s portfolio in financials, it may take even more time than that.

For investors, missing out on returns is a much easier pill to swallow than the threat of facing huge losses. Said another way: Missing the bus is better than getting hit by it.

Now to be fair to my colleague, he wasn’t necessarily calling for a recovery and asking people to jump in with both feet. He was merely pointing out that SPHB delivers the higher beta exposure it promises, even if he took issue with how Invesco PowerShares defines high beta.

My fear is that investors who have been plying their low-volatility trade for fear of headline risk will abandon their strategy, thanks to a misguided belief in sustained economic growth here in the United States and that the dark ages of market volatility are behind us.

Those investors who get too swept up in cheery headlines and market euphoria stand to get burned. To borrow liberally from Smokey Bear: “Only you can prevent portfolio fires.”



Learn why commodity ETFs are an essential part of a diversified portfolio with our Commodity ETFs channel.

Learn why bond ETFs are an essential part of a diversified portfolio with our bond ETF channel.


The oil and gold ETFs saw notable inflows on Thursday, Feb. 11.

Inflows into 'SPY' led the way for SSgA on Thursday, Feb. 11.


By Sumit Roy

Traders lost billions buying these exchange-traded products.

By Dave Nadig

For all the hype, here’s an example of an ETF working just as it should.

By Matt Hougan

Here's why you should attend the largest ETF conference in the world next month.

By Dave Nadig

Barclays built in a premium to this exchange-traded note, so back away.


By Jane Leung

A new way to hedge for currency risk in your international investments.

By Heidi Richardson

Opportunities in Germany and the eurozone.

By Shirish Malekar

How to protect your portfolio with liquid alts.