‘Low Beta Bubble’ is ‘On The Verge of Deflating’: BofA
January 12, 2014 Leave a comment
January 6, 2014, 3:26 P.M. ET
‘Low Beta Bubble’ is ‘On The Verge of Deflating’: BofA
By Brendan Conway
In investing, boring is often best. But there are cases where it isn’t — like when seemingly every investor wants staid and secure. Utility and telecom stocks showed it during 2013 when they sold off sharply due to investors’ interest-rate fears. The trend looks bigger than one bout of rate worries to Bank of America Merrill Lynch’s quantitative strategists.The love for boring investments has gotten to the point where the most staid parts of the S&P 500 have “quietly become riskier than they appear,” the group writes in a Monday note.
The firm looked at the relative valuations of so-called “low beta” stocks in the S&P 500 versus the index’s riskiest stuff (“high beta”).
The result: These seemingly staid stocks now trade at the biggest premium versus “high beta” stocks in over a decade.
From BofA’s Savita Subramanian, Dan Suzuki, Alex Makedon and Jill Carey:
Many of these stocks offered high dividend yields as well as perceived “safety”, but we think the low beta bubble is on the verge of deflating. Due to low beta stocks’ strong performance in an up market, these stocks have quietly become riskier than they appear: a simple analysis of the 1-yr vs. 5-year beta shows that Telecom and Utilities have seen the largest increase in their betas, while Financials and Materials have seen the biggest decrease.
It’s something to keep in mind if you own funds whose raison d’être is to be a kinder, gentler sort of stock fund: PowerShares S&P 500 Low Volatility Portfolio (SPLV), or sector funds for reputedly staid areas such as Utilities Select Sector SPDR ETF (XLU).
Since the start of the new year, investors have treated the low-volatility ETF and PowerShares S&P 500 High Beta Portfolio (SPHB) about the same, sending each to a loss a little over 1%.
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