Some thrill-seekers are happy to pay the price of admission to ride a roller coaster. And some investors are equally happy to pay a modest expense to experience high-octane investments with the potential for soaring gains.
Of course, it’s worth noting that these funds can often crash just as hard.
Some new funds for thrill seekers are about to hit Wall Street. Invesco (NYSE:IVZ), through its PowerShares brand, is offering a pair of new exchange-traded funds playing on high-beta (read: volatile) stocks.
For some, a high beta is a sign of high potential for profits. For others, a high beta signifies a risky bet akin to an all-out gamble. Make sure you know what kind of investor you are before even entertaining the notion of buying these funds.
The PowerShares S&P Emerging Markets High Beta Portfolio (NYSE:EEHB) and the PowerShares S&P International Developed High Beta Portfolio (NYSE:IDHB), launching Friday, will track similarly named indices comprised of 200 high-beta stocks from their respective regions. The most sensitive stocks get the highest weights.
Short of investing in leveraged ETFs, which try to generate two or three times the returns of a given asset class, it doesn’t get any more volatile than that.
While these funds’ holdings won’t be available until their launch, investors wanting an idea of what to expect can look to PowerShares’ existing high-beta ETF, the S&P 500 High Beta Portfolio (NYSE:SPHB), started May 5, 2011.
Click to Enlarge Off the bat, performance isn’t great, with the SPHB down nearly 8.9% in its young life, vs. a positive 2% return for the S&P 500. However, the ETF is up 17% year-to-date, steadily ahead of the S&P’s strong 8% return. All told, a look at the chart indicates that it exaggerates the S&P’s gains, but exaggerates the losses even more. That’s to be expected, of course, since that’s what the fund is built for. But it’s worth pointing out again just so investors are clear what they are getting into.
While this high-beta fund does spread the wealth across 100 companies, SPHB’s greatest sector allocation is financials, at almost 35%. A savvy investor might not be surprised by this, since bank stocks have had a lot more “wiggle” than the rest of the market lately. And the fund’s movement pretty much reflects both the shellacking financials took in 2011 and their strong YTD returns in 2012.
We’ll see if EEHB and IDHB are constructed similarly, but even if they’re lighter on the financials, their launch comes at what seems like a poor time. The markets have been cruising higher for months, with almost every technical analyst preaching that we’re at least due for a correction in the short term. Plus the global worry trifecta of European debt, a Chinese slowdown and Iranian oil threats lurk in the shadows, ready to give equities a good kicking at a moment’s notice.
So it stands to reason that volatile, high-beta funds could take it on the chin more than any other investment if and when the market stumbles.
As is the case with leveraged ETFs, these high-beta funds have the potential to enhance your returns. But they also can hurt you just as badly, and the risk inherent in these high-beta funds is greater than most investors care to indulge in.