High Beta Underperforming Low Volatility

As the market continues to trade sideways in its, seemingly, directionless trade, it is helpful to observe various intermarket relationships and technical indicators to see what exactly is driving returns and to check-up on the overall health of the market.  One interesting dynamic of the market this year is the underperformance of high beta stocks in relation to low volatility stocks.  In a typical bull market, high beta stocks outperform as market psychology shifts to a “risk on” mindset where cyclical companies (such as high beta and high growth stocks) are favored over non-cyclical companies that provide lower, more protected exposure.  This has not been the case this year.  High beta stocks have underperformed low volatility stocks measured by the ratio of the performance of the S&P 500 High Beta ETF (SPHB) over the S&P 500 Low Volatility ETF (SPLV).   As the ratio moves higher, high beta is outperforming low volatility and as the ratio moves lower, low volatility is outperforming high beta.

From The Blog of HORAN Capital Advisors

The performance dispersion can partially be explained by the difference in sector weighting of these two ETFs.  Given SPHB's high beta, cyclical tilt, overweights in Energy and Industrials have been a big drag on performance.  Conversely, SPLV has no Energy exposure and higher weightings to Consumer Staples and Health Care, two sectors that traditionally carry lower volatility and have outperformed the broader market this year. These are a few examples of why the low volatility strategy is outperforming not only high beta names this year, but has also caught up to the S&P 500.

From The Blog of HORAN Capital Advisors

This being said, it is interesting to note that growth stocks are still outperforming value stocks in the same time period, shown by the relationship between the S&P 500 Growth ETF (IVW) and the S&P 500 Value ETF (IVE).

From The Blog of HORAN Capital Advisors

While this is not a new dynamic to this bull market,  the amplified disparity in performance since the end of June is noteworthy as investors continue to favor companies with higher growth rates in this slow, bump along environment. High beta stocks may reverse trend and outperform the low volatility strategy should the market resume a trend to new highs, but until then, low volatility is in play.