Want a new take on an old index? Last week PowerShares gave us two new takes on the S&P 500. Thursday marked the introduction of the PowerShares S&P 500 High Beta Portfolio (SPHB) and the PowerShares S&P 500 Low Volatility Portfolio (SPLV). These two new exchange traded funds offer two very different ways to invest in S&P 500 companies.
PowerShares S&P 500 High Beta Portfolio
The PowerShares S&P 500 High Beta Portfolio is based on the S&P 500 High Beta Index. The fund and index consist of 100 stocks from the S&P 500 that have the highest sensitivity to market movements. Beta is a measure of volatility of a stock compared to the market as a whole or an index. A stock with a beta of 1 indicates that it will move with the market or index. A beta less than 1 indicates the stock is less volatile than the market or index, whereas a beta greater than 1 indicates the stock is more volatile than the market or index. For example, a stock with a beta of 1.5 is essentially 50% more volatile than the market or index.
SPHB weights stocks based on their measure of volatility over the last twelve months. The higher the volatility (beta), the more weight is given to that stock. This makes the fund very different from a typical cap-weighted fund, where the stocks are basically weighted in the order of their market cap. The SPDR S&P 500 ETF (SPY) is a cap-weighted fund that seeks to track the S&P 500 index.
Top Ten Holdings
|Name||Symbol||% of Assets|
|Cliffs Natural Resources Inc.||CLF||1.43%|
|Goodyear Tire & Rubber Co.||GT||1.37%|
|Marshall & Ilsley Corp.||MI||1.26%|
|CB Richard Ellis Group Inc (A)||CBG||1.23%|
|Abercrombie & Fitch Co. (A)||ANF||1.23%|
|Monster Worldwide Inc.||MWW||1.23%|
|CBS Corp (B)||CBS||1.22%|
|Wynn Resorts Ltd||WYNN||1.21%|
|Top 10 Percent of Assets||12.74%|
High beta stocks are generally expected to outperform the markets during bull market periods and may underperform in bear markets. SPHB has 100 holdings. The average market cap of holdings in SPHB is $15.5 billion. Net asset value is currently about $2.5 million. No distribution has been set at this time. It is reasonable to expect that SPHB will pay distributions in the future. PowerShares charges an expense ratio of 0.25% for this fund.
PowerShares S&P Low Volatility Portfolio
You can think of this fund as the opposite of the fund above. The PowerShares S&P Low Volatility Portfolio is based on the S&P 500 Low Volatility Index. The fund and index consist of 100 stocks from the S&P 500 Index with the lowest realized volatility over the last twelve months. Volatility is simply a measurement of the magnitude of up and down price fluctuations over time. By adding this fund to your portfolio you are seeking lower volatility. I consider this to be a fund that lets you own equities and still sleep at night.
SPLV weights stocks based on their measure of volatility over the last twelve months. The less volatility, the higher weighting they will receive in the fund or index. Again, this is very different from a cap-weighted approach such as the one SPY uses.
Top Ten Holdings
|Name||Symbol||Percent of Assets|
|Johnson & Johnson||JNJ||1.40%|
|Consolidated Edison Inc||ED||1.34%|
|Hormel Foods Corp||HRL||1.28%|
|Procter & Gamble||PG||1.25%|
|Top 10 Percent of Assets||13.09%|
It only takes a quick glance at these holdings to see the difference between these two funds. As you can see SPLV gives a much higher weighting to utilities and consumer staples, two sectors typically known for low volatility. The average market cap of holdings in SPLV is $43 billion.
Low volatility stocks may underperform during bull markets but are expected to hold up better in bear markets. SPLV has about $2.5 million in assets. Although no distribution has been set, it is likely to be higher than SPHB based on its holdings. PowerShares charges an expense ratio of 0.25% for this fund.
These two funds are really the first of their kind. Despite many different types of ETFs that make a lot of claims, some rather gimmicky, these two funds may really offer a benefit to some investors. Kudos to PowerShares. SPHB offers more risk tolerant investors a chance to outperform the S&P 500 during bull market runs. For investors that are more risk averse, SPLV may offer slower growth with less downside risk.