While the S&P 500 Index is down 4.3% this year through August 21, August has been much worse with a 6.3% decline. However, pain has been even greater in the S&P 500 High Beta Index, which has fallen 8.3% in August and 13% year to date. In contrast, the S&P 500 Low Volatility index is down only 3.1% in August and is down only 2.5 for the year. The August performance has not been an anomaly, in our opinion.
Through May 1, the High Beta index was the better place to invest, rising 2.9% and outperforming the Low Volatility index that declined 3.0%. However, as the old adage "sell in May" suggests, the High Beta index has corrected 17% from May 1 through August 21. However, not all S&P 500 index constituents have performed the same. Indeed, during the same period, the Low Volatility index was down 1.1%.
The PowerShares S&P 500 High Beta ETF (SPHB) seeks to track a subset of the S&P 500 index. It holds the 100 most volatile stocks and rebalances and possibly incorporates new holdings on a quarterly basis. At present, the ETF has relatively sizable exposure to industrials (19% vs. 10% for the S&P 500 index), energy (18% vs 7%) and consumer discretionary (16% vs. 13%). Meanwhile, there is no exposure to consumer staples, telecom services or utilities in SPHB, although those sectors are represented in the broader index. Interestingly, information technology (16% vs 20%) is actually relatively low.
S&P Capital IQ ranks more than 800 equity ETFs on a daily basis based on a combination of holdings-based analysis and using ETF level attributes.
While SPHB ranks unfavorably to us from a S&P Capital IQ Quality Ranking perspective, we think some of the holdings are overvalued, such as TripAdvisor (TRIP) and others undervalued, such as Alexion Pharmaceuticals (ALXN).
The PowerShares S&P 500 low Volatility ETF (SPLV) holds the 100 least volatile stocks and also
rebalances. Relative to the S&P 500 index, financials (36% vs 17%), and consumer staples (21% vs. 10%) are heavily weighted, while consumer discretionary is only 6.5% and there is no energy exposure.
The ETF ranks favorably to us from an S&P Capital IQ Quality Ranking perspective. Meanwhile, some holdings such as CVS Caremark (CVS) and Stericycle (SRCL) are undervalued, while others such as Chubb (CB 123) are fairly valued. Both SPLV and SPHB have a 0.25% expense ratio.