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New S&P 500 ETFs Offer Twists on Volatility

Stocks in this article: SPHB SPLV SSO

NEW YORK ( TheStreet) -- Two new exchange-traded funds from PowerShares offer interesting twists on that most plain vanilla of ETFs: the S&P 500 index fund.

They are the PowerShares S&P 500 High Beta Portfolio (SPHB) and the PowerShares S&P 500 Low Volatility Portfolio (SPLV).

These new funds seem to appeal to two different types of investors: those who want to make aggressive, speculative bets without the potential disadvantages of levered long funds; and those who have lost confidence in their investing abilities or have realized they have a limited tolerance for volatility.

The High Beta Portfolio owns the 100 most volatile (highest-beta) stocks from the S&P 500, and the Low Volatility Portfolio owns the 100 least volatile stocks from the same index.

In the first fund, higher-volatility stocks get higher weightings, while in the second, lower-volatility stocks get higher weightings.

The funds rescreen their holdings once a year and rebalance them each quarter.

For people who have learned that they have a low tolerance for wide market gyrations, the Low Volatility Portfolio may be appealing.

The back test for this fund is eye-opening. Its holdings would have performed better than the S&P 500 during all three years of the tech bust. In 2000, the portfolio would have risen 25%, while the S&P 500 fell 9%.

In 2008, the S&P 500 declined 37%, while the Low Volatility Portfolio would have fallen just 21%.

The key to understanding these results is understanding what's in the Low Volatility Portfolio.

This fund will tend to have heavier weightings toward health care, utility and consumer staple stocks. Right now, its biggest components include Johnson & Johnson (JNJ), Southern Company (SO) and Clorox (CLX).

These companies and others like them obviously are more likely to see more muted moves than the broader market, making them a "get rich slowly" product. The 10-year annualized return of the back test is 6.94%, vs. 5.13% for the S&P 500.

The Low Volatility Portfolio allocates 29% to utilities and 28% to consumer staples, with all other sectors being much smaller. That sector allocation should make for a high dividend yield. The underlying index currently yields 3.4%, less the 0.25% expense ration. The fund could yield better than 3%, but that remains to be seen until it commences payouts.

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