BTAL: A Different (And Effective) Low Volatility ETF

by on May 22, 2012 | ETFs Mentioned:

When it comes to defensive exposure, few assets can truly offer a safe haven escape when turbulence hits the market unexpectedly. There’s no need to look far back into history to see how a volatile environment can take its toll on asset classes across the board without mercy. The most recent Euro zone-inspired risk-aversion wave on Wall Street has put investors on edge as they struggle to find a viable means of hedging against the seemingly never-ending debt drama. The solution may be simpler than you think: enter BTAL [see Low Volatility ETFdb Portfolio].

The QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL) has attracted a fair amount of interest after an impressive performance during the recent chaos; this ETF can serve as an excellent hedging tool when considering its performance throughout the most recent correction on Wall Street. With a number of low volatility and low beta products on the market, it’s worthwhile to see how these ETFs actually hold up when markets turn sour, just as they have done so over the past few weeks [see also How To Hedge For A Market Correction With ETFs].

As such, below we compare the total returns for several like-minded ETFs spanning from 4/2/2012 to 5/18/2012. The ETFs featured below are focused on domestic large-cap equities and are classified as either low beta or low volatility products, while BTAL actually falls under the broader umbrella of Alternatives ETFs thanks to its creative approach. Also, keep in mind that broad equity markets, as represented by the S&P 500 Index, have lost 7.8% in the specified time frame, showcasing the rather vast difference in performances:

Ticker ETF Return
BTAL U.S. Market Neutral Anti-Beta Fund +11.1%
SPLV S&P 500 Low Volatility Portfolio -1.7%
LVOL Russell 1000 Low Volatility ETF -4.8%
LBTA Russell 1000 Low Beta ETF -3.5%
Source: FactSet

Returns Speak For Themselves

When considering the performance table above,  BTAL stands out as a noteworthy performer; this ETF has offered some valuable protection against adverse declines in the market, without requiring investors to take on risky, expensive, or complex trades. BTAL offers unique long-short exposure that captures the spread between low beta and high U.S. stocks. It’s underlying portfolio is equal weighted, dollar neutral, and sector neutral, consisting of long positions in the lowest beta stocks and short positions in the highest beta stocks [see also BTAL Fact Sheet].

BTAL essentially offers investors an easy way to make a bearish bet on the stock market, without going “all in” so to speak; the strategy employed by this ETF allows investors to profit when market volatility spikes, because lower beta stocks are likely to outperform higher beta securities in times of uncertainty.

What’s The Difference?

At first glance, some investors might think that the other low volatility and low beta products offer generally similar exposure as BTAL. After a closer look at performance results and investment methodologies however, it quickly becomes apparent that BTAL is truly one-of-a-kind. Take for example the biggest and most popular ETF in the low volatility group, the PowerShares S&P 500 Low Volatility Portfolio (SPLV); this offering holds 100 stocks from the S&P 500 Index with the lowest realized volatility over the past year. As such, SPLV makes significant allocations to traditionally “safer” sectors, featuring major allocations to consumer defensive and utility stocks. BTAL employs a totally different methodology; it implements an equal weighted, long-short approach, which ensures sector-neutral exposure instead of simply concentrating assets to historically stable corners of the market [see also 3 ETF Trading Tips You Are Missing].

The Russell Low Beta (LBTA) and Low Volatility (LVOL) ETFs are similar to SPLV, in the sense that they hold long-only positions in historically “safer” corners of the market. While this approach may be appealing to some buy-and-hold investors over the long-haul, it certainly fails to provide consistent protection against adverse spikes in volatility over shorter time horizons. As such, BTAL presents itself as an appealing instrument, serving as a “risk protection index” so to speak, thanks to its quantitative approach. Furthermore, this ETF is re-balanced on a monthly basis which makes it all the more of a robust hedging tool.

Of course, when markets get on a hot streak the anti-beta strategy can be less-than-optimal. BTAL lost about 1.2% when stocks rallied in Monday trading, while SPLV (up 0.50%), LVOL, and LBTA (up 1%) all were comfortably into positive territory.

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Disclosure: No positions at time of writing.