With overvaluation in the broader equity market looming large over the market leading to sharp sell-offs in momentum stocks, slowdown in some big nations like China and an emerging market lull, casting a shadow over global growth, it hasn’t been a very good time to invest in equity markets. Most global benchmarks have suffered this year while a few have managed to stay afloat despite the economic headwinds.
Amid this backdrop and fears of uncertainty, very few remain fully invested in equities while many are dialing up exposure to safe havens or taking some alternative routes. Even with these sluggish trends, some investing corners, including equities, have held up pretty well over the past few weeks thanks to their defensive nature and underlying strength (read: 3 Low Risk ETFs for a Stormy Market).
Notably, the products that were able to show resiliency of late mostly have low betas, as funds with low betas often exhibit greater levels of stability than their more market-responsive counterparts and generally remain unperturbed when the market crashes. However, investors should note that when markets march northward, these low beta funds witness lesser gains than the broader market.
What is Beta of a Portfolio?
Beta is a good measure to identify risks associated with funds/stocks. It measures the price volatility of the stocks/funds relative to the overall market. A stock with a high beta tends to be more volatile than the market and vice versa.
Generally speaking, a beta of 1 indicates that the price of the stock/fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move more than the broader market and is extremely volatile, while a beta of less than 1 indicates that the price of the stock/fund is less volatile than the market.
Below, we have highlighted three low-beta ETFs that have gained considerably in the past one month, and could be in focus if the current trend continues.
iPath S&P MLP ETN (IMLP): 0.11 Beta
Entering the market in January 2013, IMLP looks to track the S&P 500 index. There are 56 components in the index with more than 95% of exposure attributed to the energy sector. IMLP has a very low beta (1 year) of 0.11.
In fact, most of the players in the MLP space exhibit low beta against the broader market thus making any of the products like Barclays ETN+ Select MLP ETN (ATMP) and E-TRACS Alerian Natural Gas MLP Index (MLPG) a good pick.
Over the past one month, IMLP returned about 6.46% against the 0.45% gains delivered by SPDR S&P 500 ETF (SPY). Investors should also note that MLPs are high-yield vehicles and with interest rates remaining low to start 2014, the overall sector had a bull run while the entire market was slumping. The fund charges 0.80% in expenses per year (read: 3 MLP ETFs Riding Out Market Volatility).
SuperDividend US ETF (DIV): 0.41 Beta
Investors looking for current income in their portfolio can consider this Global X product. The fund follows the INDXX SuperDividend U.S. Low Volatility Index, holding 50 companies that have among the highest yields in the U.S, and with a consistent dividend paying history.
The ETF utilizes an equal weight approach with no single company accounting for more than 2.23% of the portfolio. Top sectors include utilities (23%), energy (21%), and telecom (10%). Notably, utilities and energy have treaded water quite successfully in this recent market turmoil. The fund provides a high dividend yield of 5.91% while having a moderately low beta of 0.41. DIV was up 3.16% in the last one month period.
United States 12 Month Natural Gas Fund (UNL): 0.36 Beta
This is another choice available in the space to play the natural gas futures market on a daily basis. It is a high cost choice, charging 75 bps in annual fees. The ETF – which has a beta of 0.36 – added 7.87% last month and looks to be less volatile thanks to the spread out futures profile of the product (read: Will Natural Gas ETFs Extend Their Winning Streak?).
U.S. natural gas was recently greeted with a rally and saw the highest price since February on the news of below-average stockpiles. Tightening of supplies should keep the commodity in demand as the U.S. Energy Information Administration (EIA) declared that the current level of inventory has fallen 54% below the five-year average. Record yield for another year is required to reduce the shortfall by October end. Harsh winter since November dragged down supplies last month to the 11-year low level.
In a nutshell, given the market uncertainty in the short term, investors may find low beta ETFs an intriguing option until brighter days return. Also, before looking for some low-volatility metrics like beta, investors should also look around for underlying sector strength which could shield investors from rough market movement. As of now, investors can choose from the above-mentioned low beta ETFs, which could be a worthy investment in a risky environment (read: Four Easy Ways to Play Beta and Volatility with ETFs).
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