The contraction in the U.S. economy in the first quarter of 2015, slightly overvalued status of the broader equity market and soft corporate performance do not make this a great time to invest in risky securities. Though the second-quarter data so far point to a rebound from the winter gloom, the revival is still fragile. The investing world and most importantly the Fed might be looking for some more strength in the economy to tout it as strong.
The data points released so far in Q2 show that the housing, job and inflation part of the economy are satisfactory while consumer confidence dropped to a six-month low in May. Retail sales, one of the key gauges of economic well being, came in at the weaker side in the first quarter despite the tailwind of low energy prices. The U.S. manufacturing sector also lacked luster.
In this baffling backdrop, only one factor that can propel the market is the delayed Fed rate hike. Mixed economic readings pushed back the start of the Fed tightening cycle to September at the earliest. Moreover, the Greek debt debacle and volatility in Chinese shares added to the woes. Amid fears of uncertainty, very few remain fully invested in equities while many are resorting to some alternative routes. Despite this volatility, some investing corners have been relatively stable over the past one month thanks to their underlying strength and low risk quotient.
What is Beta of a Portfolio?
Beta is a good gauge to spot risks associated with funds/equities/bonds. It measures the price volatility of the stocks/funds relative to the overall market. A security with a high beta is likely to be more volatile than the market and vice versa.
Generally speaking, a beta of 1 specifies that the price of the security is likely to shift in line with the broader market. If the beta value of a security is more than 1, the security would be more volatile than the broader market or vice versa, as per investopedia. Investors could also look at negative beta which shows an opposite relation to the broader market.
Investors should note that, the market median of beta (one year) is 0.96, as per Fidelity. If volatility continues to have an upper hand in the market, investors might consider products with negative beta.
Below, we have highlighted three negative-beta ETFs that have gained considerably in the past one month, and could be in focus if the current trend continues. However, investors should note that when the market follows an upward trajectory, these low beta funds witness lesser gains than the broader market.
Credit Suisse Merger Arbitrage Liquid Index ETN (NYSEARCA:CSMA) - beta negative 0.58
This $7-million ETN looks to provide investors exposure to a merger arbitrage strategy by tracking the Credit Suisse Merger Arbitrage Liquid Index. This index tracks a dynamic basket of stocks held as long or short positions that focus on publicly announced merger and acquisition transactions.
It is planned to capture the spread, if any, between the price of a target after a proposed acquisition is announced and the price that the acquiring company has proposed to pay for the stock of the target. For this exposure, the fund charges 55 bps in fees. With the merger and acquisition momentum on a tear thanks to plenty of easy money across the world, the note should benefit from the trend irrespective of the market condition. CSMA was up 2.3% in the last one month (as of June 1, 2015).
AdvisorShares Gartman Gold/Yen ETF (NYSEARCA:GYEN) - beta negative 0.14
The ETF provides positive returns by utilizing the Japanese yen to invest its assets in the gold market. It presents investors an option to invest in gold purchased by a liquid currency apart from the U.S. dollar. This is also an overlooked ETF option as it has amassed just $14 million in assets so far. The fund charges 65 bps in fees.
After a spectacular rally in 2013, the Japanese economy has been struggling since the second half of 2014. Japan's growth in Q1 of 2015 has also been restrained by soft consumption. This ensures that the gigantic Japanese stimulus will last long as the economy is still to stand on its own feet. On the other hand, the greenback is gaining strength on the prospective Fed rate hike sometime this year. This has brightened the appeal for GYEN. The product was up over 5% in the last one month (as of June 1, 2015).
ProShares RAFI Long/Short ETF (NYSEARCA:RALS) - beta negative 0.88
Though this fund was down 0.6% in the last one month, investors should note that the ETF could be a winner if the market sentiment wobbles. This fund tracks the RAFI U.S. Equity Long/Short Index, which provides equal allocation to both long and short equity positions.
The index currently has long positions in 234 securities with larger RAFI weights than their market cap weights and short positions in 242 securities with smaller RAFI weights. AT&T (NYSE:T), Chevron (NYSE:CVX) and Bank of America (NYSE:BAC) are the top three long holdings while The Walt Disney (NYSE:DIS), Biogen Idec (NASDAQ:BIIB) and Celgene (NASDAQ:CELG) are the top three short holdings. The fund charges 95 bps in fees.
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