After two strong up days, stocks wilted into the close
Thursday with selling pressure intensifying late in the day.
Maybe it is a sign of things to come. Then again, maybe it isn't,
but there are indications that this rally is getting tired.
Price retrenchment in junk bonds,
disappointing performances from some emerging
and strong inflows to low volatility funds could all be signs a
pullback is imminent. Should that scenario materialize, investors
will likely flock to low beta fare such as consumer staples and
utilites stocks and
The move to those sector ETFs is already underway. Remembering
that beta is a measure of
systematic risk for a security or a portfolio
relative to the broader market, it also pays to note that some
ETFs have surprisingly low betas. Those funds can prove useful
(and durable) in the event of a market pullback.
SPDR S&P Pharmaceuticals ETF (NYSE:
) It is not surprising that an ETF tracking pharmaceuticals
stocks makes a list of low beta funds. After all, pharma giants
such as Johnson & Johnson (NYSE:
) and Merkc (NYSE:
) each have betas of less than 0.6.
What is surprising about XPH having a beta of
0.87 against the S&P 500
is that this ETF is not heavy on the sector's blue-chip,
conservative names. In fact Eli Lilly (NYSE:
), Pfizer (NYSE:
), Johnson & Johnson and Merck combine for less than 17
percent of the XPH's weight.
XPH does a good job of mixing those value names in with stocks
with more of a growth feel such as Questcor (NASDAQ:
) and Salix (NASDAQ:
). The result is an ETF that is not as boring as standard pharma
fare, but also one that is perhaps less volatile than a pure
biotechnology fund. Bottom line: XPH has returned 33 percent in
the past two years. Investors that want a low-beta pure pharma
option should consider the Market Vectors Pharmaceuticals ETF
Guggenheim Frontier Markets ETF (NYSE:
) This one is sure to surprise to some investors. It might be
logical to think frontier markets, which are riskier bets than
emerging markets, would come with high betas. In reality, part of
the case for investing in frontier markets
is the historically low correlations to U.S.
found in this asset class.
FRN is not heavy on frontier markets as Chile and Colombia,
both emerging markets, combine for over 58 percent of the ETF's
weight. However, the ETF
sports a beta of just 0.75
. Additionally, FRN's standard deviation is 18.7 percent compared
to 21.8 percent for MSCI Emerging Markets Index, according to
iShares MSCI Malaysia Index Fund (NYSE:
) An ETF for an emerging market in South East Asia with a beta
that is just a fraction of that of the S&P 500? Some folks
might be apt to laugh at the notion, but such a ETF does exist.
EWM's beta against the S&P 500 is just 0.24 with a three-year
standard deviation of 16.82 percent,
according to iShares data
Here is the near-term rub with EWM: The ETF has had some
issues to deal with this year because of investor nervousness
regarding Malaysia's upcoming elections. Those elections must be
held by the end of April
. Until then, only small positions should be used with EWM.
For more on ETFs, click
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