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Summary One highly contrarian trade right now is to go high beta. Beta, or β, displays the level of volatility in the price of an asset compared to a certain benchmark. There are several of these ETFs with the PowerShares S&P 500 High Beta Portfolio being the sole high beta ETF that is focused on U.S. stocks. The PowerShares S&P 500 High Beta Portfolio appears quite attractively valued compared to the Russel Mid Cap Index. One highly contrarian trade right now is to go high beta. This theme appears to be unmarketable with ETFs built around it having little to no assets under management. The reverse theme: low volatility or low beta is extremely popular. This tells me it’s probably a good place to look for value and there is no easier way than just buy exposure through an ETF. There are several of these ETFs wit h the PowerShares S&P 500 High Beta Portfolio (NYSEARCA: SPHB ) being the sole high beta ETF that is focused on U.S. stocks. SPHB data by YCharts What is high beta? Beta, or β, displays the level of volatility in the price of an asset as compared to a certain benchmark. The volatility of the benchmark is equal to 1. A more volatile asset has a beta above 1 and a less volatile asset has a price below 1. Whether the price moved up or down doesn’t matter much, it’s movement in either direction that is measured. Bet’s are based on past price data so by definition it’s a form of investing while looking in the rear view mirror as Buffett likes to call it. Portfolio High beta stocks are the race cars of the indexes. These issues can really move and while they will leave your more pedestrian holdings far behind them when going on a run they also are the ones that can crash and burn at every turn. Just take a look at the hair-raising top 10 holdings of this ETF: Freeport-McMoran (NYSE: FCX ) Cameron International Corp (NYSE: CAM ) Marathon Oil Corp (NYSE: MRO ) Newfield Exploration Corp (NYSE: NFX ) Avago Technologies (NASDAQ: AVGO ) First Solar (NASDAQ: FSLR ) Qorvo (NASDAQ: QRVO ) Mallinckrodt (NYSE: MNK ) Harman International Industries (NYSE: HAR ) Vertex Pharmaceuticals (NASDAQ: VRTX ) Price moves lower tend to happen fast and I suspect that is why there are lots of beaten down stocks in this ETF. The energy sector that’s getting crushed in the multi-year bear market is heavily represented taking up 20% of the ETF’s allocation. A stock’s weighting is based on its beta so higher beta stocks are weighted more heavily. The ETF is rebalanced on the third Friday of February, May, August and November. There also is a minimum required volume which excludes really thinly traded issues. Valuation From a valuation perspective it’s quite an attractive basket of stocks, scoring well on a forward earnings basis, price/book ratio, price/sales ratio and especially on a price/cash flow basis. Even on yield it beats the Russel Midcap which is somewhat surprising. PowerShares S&P 500 High Beta Portfolio Russell Midcap Price/Forward Earnings 16.47 18.22 Price/Book 1.37 2.09 Price/Sales 1.2 1.34 Price/Cash Flow 5.14 9.09 Dividend Yield % 2.78 2.05 Data: Morningstar Expenses The ETF’s expense ratio is about 0.25%. Not particularly high and it compares favorably with many mutual funds and thematic ETFs bu t if you are planning to hold on for decades it will not be negligible. Why is this interesting? I started looking at this ETF myself because Murray Stahl’s recent market commentary , which dealt with high beta ETFs made a lot of sense to me. His thesis basically being market flow toward low volatility strategies help to further stabilize their prices and so a virtuous cycle has been born. With high-volatility stocks, the exact opposite virtuous cycle leads to their undervaluation. As a bottom-up stock picker I noticed many of the companies I analyze lately have a lot of debt or have some kind of volatile earnings profile due to cyclicality or something else. I had no idea why, but the explanation of volatility is out of favor makes sense to me. This means two things: 1) High-volatility stocks are fertile ground to search for undervalued securities and 2) it may be possible to benefit from this observation simply by buying an ETF that is relatively attractively valued. If you compare the PowerShares S&P 500 High Beta Portfolio to the Russell Midcap it is clear you are buying a lot more cash flow for your dollar. The downside obviously being that you will need an iron stomach to sit out the ride. Scalper1 News
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