- The Invesco S&P 500 High Beta ETF selects the top 100 most sensitive stocks in the S&P 500 over the past year.
- But the time to invest in a high beta fund was many months ago, and now, the risk to return ratio doesn't make sense.
- The ETF still holds several high-potential stocks in cyclical industries like Travel Services, Airlines, and Resorts & Casinos, but their futures are very uncertain with the Delta variant in play.
- This article will provide investors a simple framework for determining when to rotate in and out of sensitive ETFs like SPHB.
The Invesco S&P 500 High Beta ETF (SPHB) is anything but a buy-and-hold fund. Investors need to be extremely careful about choosing entry points because, over the long run, the S&P 500 is easily the better pick by both absolute and risk-adjusted returns. Thankfully, determining these entry points isn't rocket science. In this article, I will describe a simple method you can use to time your trades. Though the time to invest in SPHB was many months ago, the impact of the Delta Variant could change everything, and the next time you'll know what to do.
SPHB tracks the S&P 500 High Beta Index, selecting the 100 most sensitive stocks in the S&P 500 (SPY) over the last twelve months. Fees are a modest 0.25%, and the Index reconstitutes quarterly on the third Friday of February, May, August, and November using data from the prior month. Weights are assigned proportionally to a company's beta.
Being a high beta fund, it's not surprising to see Information Technology, Consumer Discretionary, and Energy at the top of the list. Financials total 19.34% of the fund, too, but the majority of these stocks are in industries like Regional Banks (7.49%), Insurance (4.58%), Asset Management (3.42%), and Credit Services (3.07%).
Invesco updates the top ten holdings daily, as shown below. Due to its weighting method, they total just 13.49% of the ETF.
As for performance, I don't think there's any question that SPHB makes for a poor core holding. Since its inception, it's lagged SPY by 1.73% per year and experienced more risk as measured by standard deviation. While higher risk is precisely the point of the ETF, the poor Sharpe and Sortino Ratios, two traditional risk-adjusted return metrics, indicate long-term investors aren't likely to benefit from this strategy.
Source: Portfolio Visualizer
Developing A Simple Technical Framework:
While not an appropriate core holding, there are significant upsides to trading in and out of SPHB and SPY. The following table shows the ten worst drawdowns of SPY in the last decade. I've added the corresponding forward returns based on the length of the drawdown in question. For example, if the drawdown period lasted three months, the forward-looking period would also be three months.
It's telling and perhaps quite obvious that in nine out of the ten periods, SPHB went on to outperform SPY after the drawdown. Often, the performance was significant. For example, from April to June 2020, it beat by 17.40%. Even going back to October 2011 to June 2012, the outperformance was nearly double digits. Intuitively, it makes sense as well. Managers are rebalancing client portfolios, and value investors see more opportunities.
The key to this strategy is to keep your forward outlook roughly the same length as the drawdown period. Often, rebalancings are done primarily to comply with a portfolio's investment policy rather than a change in perspective. The last thing you want to do is give back your gains because you held too long. Instead, the goal is to take advantage of short-term trading behavior.
However, a flaw with the drawdown method is that investors never really know when the drawdown will end. In March 2020, it was hard to imagine the stock market would disconnect itself from reality as much as it has, but here we are. To simplify things, I suggest using SPY's trailing two-month return (roughly the length of the average drawdown) as a leading indicator. I made some calculations, and since July 2011, the average two-month return was 2.44% with a 5.24% standard deviation. Assuming a normal distribution puts the confidence interval for two-month returns anywhere between -8.04% and 12.92%. Let's now simulate the performance of an investor selecting SPHB when the market has fallen more than 8% over two months and SPY as the default asset otherwise.
As shown, the strategy of only owning SPHB when SPY's two-month returns have dipped below 8% paid off well. The portfolio grew to $47,731 in ten years from August 2011 to July 2021, or at an annualized rate of 16.92%. This beat SPHB and SPY by 2.90% and 1.68%, respectively.
As of the end of July, SPY has returned a cumulative 4.74% in the last two months. In other words, it's not even close to the threshold. We're going to need another significant correction before SPHB becomes attractive again.
We Must Be Objective
You may look at SPHB's composition and think there is room left on the runway for growth. Indeed, the average stock had a 3.79% positive revenue surprise last quarter. Nearly 15% of the ETF is in Travel Services, Airlines, and Resorts & Casinos, which are still trading at about the midway point between their 52-week highs and lows. SPHB's 17 Energy stocks are trading, on average, 8.58% below their 50-day moving average prices. Still, we must remain objective. To put things in perspective, here are some weighted-average statistics for SPHB's top 15 industries, which comprise about two-thirds of the fund.
Revenue growth rates are terrible. Even on a five-year annualized basis, SPHB's constituents have only grown it at 3.44%. The low single-digit return on assets is perhaps even more disappointing. Coupled with the high five-year beta of 1.44, it becomes clear that these aren't just high-risk plays. Many are deep value plays in a highly uncertain economic environment. I can't justify the risk without a significant market correction first.
The S&P 500 High Beta ETF works best during market corrections, roughly in the 8% range. At this point, portfolio managers are bound to rebalance client portfolios by purchasing assets in the most unloved industries, which SPHB will likely be holding. At other times, though, it doesn't make much sense to own. Over the long term, it underperforms the S&P 500 and not only has worse risk-adjusted returns but has worse downside risk-adjusted returns.
Since the S&P 500 has returned 4.74% between June and July, we're nowhere near the -8% trigger point. As such, my recommendation falls somewhere between bearish and neutral. I'm recommending investors be patient while we see the impact the Delta variant will have on markets and lean a bit more on the low-end risk spectrum instead.
This article was written by
I perform independent fundamental analysis for over 850 U.S. Equity ETFs and aim to provide you with the most comprehensive ETF coverage on Seeking Alpha. My insights into how ETFs are constructed at the industry level are unique rather than surface-level reviews that’s standard on other investment platforms. My deep-dive articles always include a set of alternative funds, and I am active in the comments section and ready to answer your questions about the ETFs you own or are considering.
My qualifications include a Certificate in Advanced Investment Advice from the Canadian Securities Institute, the completion of all educational requirements for the Chartered Investment Manager (CIM) designation, and a Bachelor of Commerce degree with a major in Accounting. In addition, I passed the CFA Level 1 Exam and am on track to become licensed to advise on options and derivatives in 2023. In November 2021, I became a contributor for the Hoya Capital Income Builder Marketplace Service and manage the "Active Equity ETF Model Portfolio", which as a total return objective. Sign up for a free trial today! Hoya Capital Income Builder.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SPY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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