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ETF Focus Report Master - ETF FACT CARD_EQ-page-001-2

While the S&P 500 and Nasdaq 100 are down about 10% and 15% year-to-date, respectively, there's one area that has been a bit surprising in its resilience - high beta.

The Invesco S&P 500 High Beta ETF (SPHB), which measures the 100 most volatile stocks in the large-cap index, is actually down slightly less than 9% year-to-date. Riskier assets tend to underperform during volatile markets, which makes it curious why it's actually outperforming the S&P 500 by 1%.

High beta is the one theme that has yet to really contract throughout everything over the past year - soaring inflation, an imminent and aggressive Fed rate hike cycle, slowing GDP growth and the conflict in Ukraine.

The high beta/low volatility ratio, which should be moving lower, has instead found steady resistance at its current level.

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Even in the most recent drop where it appeared that the resistance level was finally broken and could usher in a steeper fall, it quickly recovered it once more.

I believe that this trend is simply unsustainable. Conditions have been trending more unfavorably throughout the past several months, but the current inflation landscape, where it looks like the previously expected peak sometime in March or April is going to get pushed forward at least another couple months, could alter forecasts further.

Now, it looks like the Fed is going to be forced to fully focus on inflation (the fact that the Fed futures market is now pricing in 7 quarter-point hikes in 2022 from the previous 6 helps confirm this notion) instead of growth. Growth could slow at a faster pace than originally anticipated and I don't believe that's been fully priced into high beta stocks.

The Fed being forced to tighten aggressively heading into a slowing growth cycle is not going to be good for risk assets, in general, but I suspect that high beta stocks, led by a 50% allocation to tech and another 16% to consumer discretionary, will be hit abnormally hard.

For the foreseeable future, I'm going to be bearish on SPHB.

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