Buy These High Beta ETFs For a Santa Claus Rally - ETF News And Commentary
06 Décembre 2013 - 6:00PM
Zacks
The U.S. equity market
continued its strong rally this year, thanks mainly to the Fed's
easy money polices. Decent Q3 earnings growth and a string of
robust U.S. data of late, signaling speedy economic growth, further
supported the bullish trend.
Solid Data
The U.S. GDP growth for the third quarter was revised up to 3.6%
from 2.8% reported earlier, well above the 2% expectation in a
survey of economists by Bloomberg News and 2.5% growth in the
second quarter. The labor market is also improving gradually as the
number of jobless claims fell for the week ending November 30 fell
to 298,000---lowest since the first week of September.
Additionally, rising home-building permits and new construction
plans are injecting optimism into the recovering housing market and
the overall economy amid rising mortgage rates. Building permits
for new homes increased from 5.2% in September to 6.2% in October,
reaching the highest level in five years. This suggests an increase
in hiring, leading to a healthier job market in the coming months
(read: 3 Homebuilder ETFs Leading the Pack this Earnings
Season).
Further, China’s new economic reform plans and improving European
conditions supported the broad rally. The slew of solid data
reignited the speculation that the Fed could scale back its
monetary stimulus some time soon. However, the Fed is seeking to
keep interest rates near the zero level, even if tapering starts,
until unemployment hits 6.5% and inflation stays under 2.5%.
While the job picture looks brighter, consumer sentiment seems to
be fading. U.S. consumer confidence continued to slide in November
following the October plunge. This is especially true given that
the Consumer Confidence Index, measured by the Conference Board,
dropped to a seven-month low to 70.4 in November from a revised
72.4 in October.
Is Santa Claus Rally Coming to Market?
The S&P 500 has rallied 27% so far this year, representing the
biggest annual gain in more than a decade. This bull trend will
likely continue this month if history is any guide (read: 3 Sector
ETFs Crushing the Market in 2013).
December has a proven track record of being the best performing
month for the S&P 500 due to a Santa Claus Rally. Over the past
50 years, the S&P 500 benchmark gained 1.9% on average in
December and based on this, we expect continued uptrend in the
stock market.
How to Play
Based on seasonal trends, bullish outlook and improving
fundamentals, investors should take a look at the following two
high beta ETFs likely to ride on the surging stock market.
Notably, high beta funds tend to rise or fall more than the stock
market and are thus more volatile. When markets soar, the high beta
funds experience larger gains than the broader market counterparts
and thus, outpace their rivals (see: all Large Cap ETFs here).
PowerShares S&P 500 High Beta Portfolio
(SPHB)
This fund tracks the performance of 100 stocks from the S&P 500
Index with the highest realized volatility over the past 12 months.
It has amassed $552.2 million in its asset base and trades in good
volume of more than 134,000 shares a day. The ETF charges 0.25% in
expense ratio.
The product is widely spread out across each security as none of
them holds more than 1.4% of total assets. PulteGroup (PHM), Vertex
Pharmaceuticals (VRTX) and Genworth Financial (GNW) occupy the top
three positions in the basket. The fund puts more focus on large
caps as these account for 60% share while mid caps take the
remainder. Nearly 60% of the portfolio is tilted toward value
stocks (read: 3 Ultra Cheap ETFs for Value Investors).
From a sector look, financials take the top spot with one-fourth
share in the portfolio, closely followed by energy (18.26%) and
consumer discretionary (16.29%). SPHB had a strong run this year,
gaining 34.5% so far. The fund has a Zacks ETF Rank of 3 or ‘Hold’
rating with a ‘High’ risk outlook.
PowerShares S&P International Developed High Beta
Portfolio (IDHB)
This ETF targets high beta securities in the developed markets,
excluding the U.S. The fund seeks to measure the performance of 199
stocks from the S&P Developed ex US and South Korea LargeMid
Cap BMI Index with the highest realized volatility over the
trailing 12 months.
The fund is unpopular and illiquid as depicted by its AUM of $5.8
million and average daily volume of under 8,000 shares. The product
charges 25 bps in annual fees from investors. Like its U.S.
counterpart, the ETF maintains a good balance between securities as
each hold less than 1.1% of assets.
IDHB is skewed toward the large cap securities at 72% while mid cap
accounts for 26% share. The fund is well spread across style box
with a nice mixture of growth, value and blend securities. Here
again, financials dominate the fund’s return at 36% while
industrials and materials round off to the next two spots (read:
Top Ranked Financial ETF in Focus: VFH). The fund returned nearly
15.5% in the year-to-date time frame.
Bottom Line
Given the current bullish fundamentals, both products could be a
winning strategy this month for risk tolerant investors. This is
because funds with high beta stocks will often exhibit greater
levels of volatility and usually return more when the market is
surging.
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