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.
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.”
Smart beta isn’t smarter than cap weighting, but it is different, and that’s great for investors.
Trial by fire is one way to discover why ETF transparency matters.
Most people now realize leveraged ETFs can hurt you, but how, then, to use them?
What would a shift out of a mutual fund and into an ETF look like up close?