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Should You Play High Beta ETFs Now?

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Looks like heightened trade tensions between China and the United States and investors’ fear about the crash in technology stocks — that spooked Wall Street in the last one month — have eased.  And geopolitical tension in the Middle East thanks to the recent Syria issue is not strong enough to cause an upheaval in the market (read: Oil Price Jumps on Syria Turmoil: ETFs & Stocks to Trade).

There has been a chain of retaliation in import tariff announcements by China and the United States since March. President Donald Trump intended to “protect the technology and intellectual property of American companies and American people” and engrossed itself in a trade war with China.

Trump mentioned that the United States is open to discussions with China. President Donald Trump also said in a tweet on Apr 8 that he expects China to reduce trade barriers and not to respond to U.S. taxes. This could ease heightened tensions of a trade war.

Then, in April, Russia has been condemned internationally over the weekend for supporting the Syrian government, which is allegedly responsible for a chemical weapons attack. The United States has already imposed its harshest sanctions to date against Russian oligarchs, officials, businesses and agencies and is forming a pact with the U.K. and France. It recently ‘launched strikes’ on Syria. But market experts do not see any broad-based sell-off out of these sanctions (read: Why Gold Mining ETFs Are Rallying).

Plus, tech stocks, especially the FANG ones, were hard hit in March after reports of data breaches in Facebook. Speculation over extensive regulation on social media stocks took tech stocks into a tailspin. But the selloffs appear to be overdone. After all, technology stocks are expected to log 20.8% earnings growth on 11.4% higher revenues in the first quarter, per Earnings Trends issued on Apr 11, 2018 (read: 5 Reason Why FANG ETFs Lost Their Charm in March).

High Beta ETFs in Focus

Though the road could be blocked with worries occasionally, investors can play receding tensions in the market through high beta ETFs at this moment. Beta is directly related to market movement. Notably, high beta funds tend to rise or fall more than the stock market and are thus more volatile. When markets soar, high beta funds experience larger gains than the broader market counterparts and thus, outpace their rivals.

ETF Picks

PowerShares S&P 500 High Beta Portolio (SPHB - Free Report)

The 99-stock fund looks to track the S&P 500 High Beta Index. The index is compiled, maintained and calculated by Standard & Poor's and consists of the 100 stocks from the S&P 500 Index with the highest sensitivity to market movements, or beta, over the past 12 months. Applied Materials Inc, Lam Research Corp and Micron Technology Inc. are the top three stocks of the fund. No stock accounts for more than 1.53% of the portfolio.

Information technology and financials are the top two sectors with about 30.2% and 25.9% share, respectively. Industrials and consumer discretionary take the next two spots with respectively about 14.7% and 8.6%. The fund charges 25 bps in fees.

Elkhorn Lunt Low Vol/High Beta Tactical ETF (LVHB - Free Report)

The ETF is based on the Lunt Capital US Large Cap Equity Rotation Index, which looks to rotate between low-volatility and high-beta stocks on the S&P 500. The strategy intends to seize alpha created by the wide dispersion between low volatility and high beta stocks. The fund holds about 100 stocks in the portfolio.

No stock accounts for more than 1.41% of the fund. Coca-Cola Company, Ecolab Inc and PepsiCo hold the top three spots of the fund. Financials (26.5%), Utilities (22.9%) and Industrials (15.9%) are the top three sectors. The fund charges 49 bps in fees.

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