The High Beta Enigma

It may look like the PowerShares S&P 500 High Beta Portfolio (SPHB) predicted the August sell-off, but is that really the case?

Oct 23, 2015 at 9:52 AM
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Even though the CBOE Volatility Index (VIX) is back to "normal" (whatever you take that to mean), the effects of the Great Volatility Rally of 2015 still linger. High-volatility names have not fully recovered, as evidenced by the PowerShares S&P 500 High Beta Portfolio (SPHB), described below:

"The PowerShares S&P 500® High Beta Portfolio (Fund) is based on the S&P 500® High Beta Index (Index). The Fund will invest at least 90% of its total assets in common stocks that comprise the 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. Beta is a measure of relative risk and is the rate of change of a security's price. The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August and November."

You'd think by definition SPHB would outperform in an up market and underperform in a down market. But that's only partly true this year.


SPHB had no value add or loss right into the end of June, nor did the SPDR S&P 500 ETF (SPY). But the market churn continued for another seven weeks or so. Meanwhile, SPHB tanked. It was already down 9% or so before the August market ugliness.

You could interpret that as predictive, but I'm not sure that's real accurate. Here's how the same graph looks if I simply start it on Aug. 21:


Logically, it should have rallied faster than the broader market into the recovery and would be close to "even" now. But that's not the case. More accurately, high beta really hasn't lived up to its name at all this year. There was no "beta" in the first six months, and no "beta" again in the last two months. The only thing it's really done is get relatively clobbered ahead of the broader market ugliness.

I have no real explanation. My first thought was it's somehow related to Apple Inc. (NASDAQ:AAPL), but that doesn't work. AAPL outperformed both SPY and SPHB in the first half of the year. If it was overly responsible for tugging SPHB, it would have manifested in high-beta outperformance. But then it underperformed everything in the July-August window, suggesting at that point it did impact SPHB. But then in the last two months it outperformed everything again -- yet as we just saw, high beta didn't see relative strength.

So, I'm going to chalk this up to an oddity. Lots of things look predictive in hindsight. High beta is no exception in that it "called" the overall market drop. I'm just not sure that's anything I'd want to bank on going forward.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research



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