Searching for Beta in Financials

On Monday July 13, 2009, the Financial Select Sector SPDR ETF (XLF) closed at $11.81/share, up 6.39% in just one trading session. Several financials, including Goldman Sachs (GS), were set to release earnings later in the week. The thought was that if GS had good Q2 2009 earnings that the whole financial sector would continue to rally.

This thesis proved correct as the XLF fund traded up to $12.26/share at the close of Wednesday July 15, 2009, up 4.25% from Tuesday’s close.

Going long on Monday or Tuesday using the XLF as a trading vehicle would have given the investor a nice gain with limited risk. Advanced traders could reap even larger gains using options. One exchange traded fund (ETF), the Ultra Financials ProShares (UYG), does this for you. Using options, this fund seeks the

daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones U.S. Financials index.

The UYG fund will, in theory, always be up or down about twice as much as its benchmark.

Searching for Beta in the Financials

Investors may also search for beta as a way to increase returns using a fixed amount of capital. The beta of a U.S. stock is loosely defined as a multiple of the underlying securities daily return versus the S&P 500. For example, a stock with a beta of .5 would, on average, rise or fall half as much as the S&P 500 in one trading session.

In a financial rally, a stock with a beta over 2.0 versus the XLF (rather than the entire market) would typically return more than twice the daily gain of the Dow Jones U.S. financial index.

Under my analysis, Felcor Lodging Trust (FCH) has a July 2009 beta rating of 2.3 vs. the XLF (as of 7/16/09).

Utilizing a stock such as FCH as a high-beta trade, as seen above, can be quite rewarding.

Calculating the beta of a stock versus the S&P 500 or its underlying index can be done easily using Microsoft Excel. Yahoo! Finance also states the beta of a stock under key statistics. According to Yahoo! Finance, the beta of FCH is 3.66 (versus the S&P 500).

Disclosure: No positions.