This morning, PowerShares launched two new high-beta ETFs: the
PowerShares S&P Emerging Markets High Beta Portfolio
(NYSEArca:EEHB) and the PowerShares S&P International Developed
High Beta Portfolio (NYSEArca:IDHB).
Despite the slew of factor ETFs out there, these are the first that
deliberately focus on riskier assets abroad in the chase for higher
They both select and weight stocks on the basis of their beta, or
sensitivity to market movements, over the past year. A stock's beta
essentially functions as its multiplier of market returns. All
other factors held constant, if the market returns 1 percent, a
stock with a beta of 2 would be expected to return 2 percent.
Of course, the opposite holds true as well-if the market falls by 1
percent, that same stock would be expected to fall by 2 percent.
What exactly is the market? EEHB defines its market as the S&P
Emerging BMI Plus LargeMid Cap Index that it pulls its constituents
from. Similarly, IDHB defines its market as the S&P Developed
ex. US and South Korea LargeMid Cap BMI Index.
The high-beta screen and weighting scheme mean that EEHB and IDHB
differ significantly from the broad emerging and developing market
indexes. A look at each ETF's country and sector allocations
compared to comparable broad market ETFs confirms this intuition.
In the emerging space, I've compared EEHB to the SPDR S&P
Emerging Markets ETF (NYSEArca:GMM), which tracks the S&P
Emerging BMI Index. A notable difference between the two funds,
before even considering beta, is that the S&P BMI Emerging
Markets High Beta Index includes South Korea, while the S&P
Emerging BMI Index doesn't.
The table below shows the top countries in EEHB. You'll notice that
while EEHB's 32 percent allocation to South Korea certainly skews
it away from GMM, it doesn't explain its over-allocation to Hong
Table 1. Top Country Weights - EEHB vs. GMM
EEHB is also significantly overweight in industrials and
Table 2. Sector Weights - EEHB vs. GMM
The developed ETFs are also very different, in surprising ways.
I've compared IDHB to the SPDR S&P World ex-US ETF
(NYSEArca:GWL), which is based on the S&P Developed ex. US BMI
The difference between IDHB begins with its top country
allocations:It overweights Sweden, as well as Italy, Norway, and
Greece. Italy and Greece are unsurprising-after all, they've been
driving much of the world market's returns, so it makes sense that
they would react strongly to their own bad news.
However, I'm not quite sure where Sweden and Norway are coming
from. In addition, notable absences from IDHB's top country
allocations include Japan, which has an 18.4 percent weight in GWL;
Canada, with a 10.15 percent weight in GWL; and Australia, with a
7.5 percent weight.
Table 3. Top Country Weights - IDHB vs. GWL
The sector allocations are also very different-health care and
telecom are missing from IDHB, though they make up 13 percent of
GWL. IDHB also overweights financials, industrials, and
Table 4. Sector Weights - IDHB vs. GWL
If you think that the markets abroad are about to rally and want
access to the most market-sensitive stocks, EEHB and IDHB are
surprisingly inexpensive-EEHB costs 0.29 percent a year and IDHB is
0.25 percent. Both have fee waivers in place through April 20, 2013
to hold their expense ratios at current levels. In comparison,
you'll pay 0.59 percent for GMM or 0.34 percent for GWL.
The choice of either fund is definitely bold, but, if you're
they'd both have huge rewards.
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