PowerShares Debuts High Beta, Low Volatility ETFs

by on May 6, 2011 | ETFs Mentioned:

PowerShares rolled out the latest additions to its ETF lineup on Thursday, commencing trading on two ETFs that offer exposure to specific subsets of the S&P 500 Index. The two new ETFs are:

  • S&P 500 High Beta Portfolio (SPHB): This ETF will seek to replicate the S&P 500 High Beta Index, a benchmark that consists of 100 stocks from the S&P 500 with the highest sensitivity to movements in the broader index over the past 12 months. The underlying index is beta-weighted, making SPHB the first ETF to utilize that weighting methodology to offer exposure to the U.S. equity market.
  • S&P 500 Low Volatility Portfolio (SPLV): This ETF will replicate the S&P 500 Low Volatility Index, a benchmark that consists of 100 stocks from the S&P 500 Index that have exhibited the lowest realized volatility over the previous 12 months. The underlying index is volatility weighted, making SPLV the first ETF to utilize such a methodology and resulting in a composition that is significantly different than cap-weighted products.

At launch, SPHB had a heavy tilt towards mid cap stocks, making the return profile very different from the index from which components are taken. Moreover, the ETF maintained a unique sector allocation and degree of concentration from broader-based S&P 500 ETFs such as SPY or IVV:

Sector IVV SPHB SPLV
Financials 15.5% 30.9% 7.9%
Energy 12.6% 18.2% 1.8%
Consumer Discretionary 10.7% 18.7% 4.6%
Health Care 11.5% 0.8% 10.0%
Industrials 11.1% 6.6% 7.1%
Technology 18.1% 12.7% 4.6%
Materials 3.6% 11.1% 2.7%
Utilities 3.3% 1.0% 29.0%
Consumer Staples 10.6% 0.0% 28.3%
Source: iShares, PowerShares

The new ETFs allocate assets relatively evenly among component companies, resulting in significantly lower concentration than many market cap-weighted benchmarks. Despite having far fewer components, both SPHB and SPLV make materially smaller allocations to their top components than SPY or IVV. The top ten components of the S&P 500 account for close to 19% of the index. The ten largest components of SPHB make up only about 12.7% of holdings, while SPLV’s top ten comes in at just over 13% [S&P 500 ETF Investing: Nine Spinoff Options].

Potential Uses

SPHB and SPLV can be potentially useful tools for fine-tuning domestic equity exposure. Because it focuses on high beta stocks, SPHB can be expected to exhibit greater overall volatility than the S&P 500. That could make it a desirable asset for investors expecting a bull market, as it essentially leverages U.S. equity exposure. SPLV could be appealing in an opposite environment; by focusing on stocks that exhibit low volatility, it could perform relatively well in down markets. As such, the low volatility ETF could be appealing for investors looking to scale back risk exposure while still maintaining a position in domestic equities–trimming the downside risk without going so far as to invest in Treasuries or cash. “We believe the PowerShares S&P 500 Low Volatility Portfolio is an attractive tool for advisors seeking lower volatility for the portfolio core, and may offer a measure of protection in down cycles while still potentially participating in upward trending cycles,” said Ben Fulton, Invesco PowerShares managing director of global ETFs [see Five Twists On S&P 500 ETFs].

First To Market

The new PowerShares ETFs are the first of their kind, though perhaps not by much. iShares has been busy sketching out a suite of minimum volatility ETFs, including products focusing on the U.S. equity market, EAFE region, and emerging markets. And Russell has laid the groundwork for a number of domestic equity ETFs, including high beta, low beta, high volatility, low volatility, and high momentum versions of both the Russell 1000 and Russell 2000. The timing of Russell’s entrance into the U.S. ETF industry is uncertain, but that move could come at some point during the second quarter.

Both new PowerShares ETFs will charge an expense ratio of 0.25%. Exposure to the S&P 500 is available for as little as 0.06% through Vanguard’s VOO [Finding The Best S&P 500 ETF].

Disclosure: No positions at time of writing.