Low Beta Stock ETFs Tend to Out Perform

07/29/2011 0 comments

Geoff Considine had a recent article on Portfolioist.com that shared some interesting facts about low-beta stocks. Beta is a statistic parameter for a stock price volatility with respect to stock benchmarks such as S&P 500 index (SPX).

He cited two research resutls that supported the assertion that these low beta stocks tend to out perform other stocks in a long term period:

  • Research by Eugene Fama (Chicago) and Ken French (Dartmouth) popularized the idea that value stocks and small cap stocks generate out-sized returns (the so-called size and value factors). What is less well-known is that their research also found that stocks with low beta tend to out-perform : "...funds that concentrate on low beta stocks, small stocks, or value stocks will tend to produce positive abnormal returns ...even when the fund managers have no special talent for picking winners.
  • A more recent academic study written in late 2010, also finds that ... low beta stocks tend to outperform. This study examines a wide range of non-U.S. equity markets, corporate bonds, and futures.

He further mentioned three ETFs that mainly invest in low-beta stocks:

  • PowerShares S&P 500 Low Volatility Fund (SPLV): Invests in the 100 stocks from the S&P 500 Index with the lowest beta performance (as determined by the underlying index which is maintained by Standard and Poor's). The ETFs has an expense ratio of 0.25%. (Source: PowerShares S&P 500 Low Volatility Fund prospectus, available at http://www.invescopowershares.com/).
  • Russell 1000 Low Volatility ETF (LVOL): Invests at least 80% of total assets in comprising the Russell-Axioma U.S. Large Cap Low Volatility Index. The ETF has an expense ratio of 0.49% (Source: Russell 1000 Low Volatility ETF prospectus, available at available at http://www.invescopowershares.com/).
  • Russell 1000 Low Beta ETF (LBTA): Invests at least 80% of total assets in common stocks that comprise the Russell-Axioma U.S. Large Cap Low Beta Index. The ETF has an expense ratio of 0.49% (Source: Russell 1000 Low Beta ETF (LBTA) prospectus, available at available at http://www.invescopowershares.com/).

With the above, let's look at an interesting stock that is not glamorous at all: Colgate-Palmolive (CL), a household name for personal care items such as tooth pastes. The following is CL's performance from 1/3/1977 (the first date we have its price data) to 7/19/2011:

 

Last 5 Years Last 3 Years Last 1 Years Up To Date
Alpha(%) 0.012 0.021 -0.008 0.067
Beta(%) 50.862 52.516 39.797 53.531
AR(%) 9.627 11.192 9.08 18.386
RSquared(%) 36.307 40.753 12.723 7.104
Sharpe Ratio(%) 39.622 44.954 55.9 53.162
Standard Deviation(%) 21.43 24.557 16.121 27.534
Treynor Ratio(%) 16.694 21.021 22.644 27.344
Draw Down(%) 31.091 31.091 12.815 33.887

For more details, refer here.

This is a remarkable stock with very consistent price return performance and about half (0.5) beta, compared with S&P 500. In the last five years, it returned 9.6% annualized, what is more astounding is that it had annualized 18.3% in the past 38 years! Talk about shareholders' returns!

Symbols: CL, SPLV, LVOL, LBTA, SPX, Dividend Stocks

 



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