As the exchange-traded products industry has continued to
evolve, one of the more interesting phenomenons has been the rise
of
volatility funds
. These ETFs allow investors to dial down or ratchet up their
exposure to highly volatile stocks.
Along with volatility funds, high and low beta ETFs have
appeared on the scene. As traders should note, beta and
volatility are two fundamentally different things. Beta measures
a stock's risk relative to the broader market, while volatility
is statistical measure of the dispersion of returns for a given
security or index,
according to Investopedia
.
However, the current market environment is not rewarding high
volatility or high beta positions. This may explain the struggles
of at least one new ETF, the PowerShares S&P International
Developed High Beta Portfolio (
IDHB
).
The PowerShares S&P International Developed High Beta
Portfolio came to market in February and has thus far only
attracted about $2 million in assets under management. Home to
almost 200 stocks, it should be noted that IDHB is cheap with an
annual expense ratio of just 0.25%.
IDHB's high beta ways are easy to understand as the ETF's name
gives itself way. This is an international fund, and while it
offers no exposure to emerging markets, the ETF has a 3.6%
allocation to Canada with the rest of IDBH's weight going to
European nations. Sweden leads the way with an allocation of
almost 18%. Those that doubt Sweden's status as a high beta
market, should note the fact that the beta on the iShares MSCI
Sweden Index Fund (NYSE:
EWD
) is 1.74.
Overall, about 31% of IDHB's weight is devoted to Scandinavian
countries, which
reduces the fund's Euro Zone exposure a bit
, and that Scandinavian exposure could be profitable going
forward.
On the other hand, about 38% of IDHB's weight goes to Euro
Zone members and the ETF's
10.3% weight to Italy is not something to be
bragging about at this point
. A 10.9% allocation to France has the potential to be a
near-term problem as well, as the Euro Zone's second-largest
economy has been rumored to be a possible target for a credit
rating downgrade.
In terms of individual holdings, IDHB focuses primarily on
large and mid-caps with over 55% of the fund's weight going to
large-cap growth and large-cap value names. Only a scant
percentage of the fund's holdings are small-caps, but it is the
sector composition that raises red flags.
The economic outlook for most Euro Zone nations is weak at
best. Italy is in a recession and growth there is expected to
contract this year. Additionally, Belgium, France and the
Netherlands aren't going to wow anyone with their near-term
economic outlooks and that provides a cautionary tale. IDHB has a
31% weight to financials, 20.3% allocation to industrials and a
14.5% concentration to consumer discretionary names. All high
beta sectors are vulnerable as global investors speculate that
the fate of the Euro Zone and the common currency remains
grim.
Bottom line: IDHB, which has not traded in several weeks, is
the prime example of an ETF that needs global macroeconomic
factors to be working in its favor. That is not happening right
now. If and when that time comes, global investors may want to
back up the bus on the Europe, and IDHB could flourish.
Predicting when that will happen is the tricky part.
For more on Europe ETFs, please see
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.