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Why I'm Adding High Beta Stocks To My Portfolio Right Now

Falling volatility, low interest rates and the reopening trade make this an ideal time to add some risk.

The S&P 500 has risen about 88% off of the March 2020 bear market low. That's a huge bull market run by almost any standard and it leaves traders wondering how much higher the current leg can run. Since the latest bull run started, the S&P 500 has pulled back 9% just once and has been no more than 4% from its highs over the past 6 months. Clearly, stocks could be due for a pullback at some point in the near future.

I don't think it'll be soon though. As it stands right now, I think conditions are setting up nicely for at least another short-term advance in stocks and I think it could be riskier stocks, in particular, that benefit.

The Case For High Beta Stocks

In order for high beta stocks to outperform, investors really need to believe that conditions are favorable for more growth-oriented companies to advance. That includes evidence that the economy is going to continue to grow and expand, Fed policy decisions will keep things loose and accommodative and markets remain relatively calm.

I think we're seeing all three of those conditions happening right now.

The biggest factor for me right now is what we're seeing from the VIX.



The volatility index has drifted all the way down to the 16 range, its lowest level since the pre-pandemic days. VIX readings in the mid-teens generally indicate an environment of above average market calm that plays well for steadily rising equity prices. As the markets remain calm, investors feel comfortable adding more risk.

We saw that last week as the VIX drifted lower, the S&P 500 added 1.2%, while the Russell 2000 was up 2.5%. Contrast that with the more defensive utilities sector, which fell 1.5%. Investors were in risk-on mode thanks to low volatility readings and I think that continues as long as the VIX remains in the teens.

The second factor I'm seeing is the market's reaction to inflation. Every reading we've seen recently - overall inflation rate, core inflation rate, PCE rate - has come in above expectations. Part of that is the low base effect, but you can look at food, gas, commodities and housing prices as evidence that inflation is indeed here.

But investors don't really seem to care. They seem to be buying into the Fed's narrative that it's all transitory and part of a normal economic rebound. Stock prices continue rising and, more importantly, Treasury yields haven't really budged in weeks. You'd expect rates to shoot higher if inflation is becoming a serious risk, as they did earlier when inflation was a concern. Today, investors are taking it in stride. Inflation could be one of the biggest risks to a prolonged recovery, but if investors don't appear concerned (for better or worse), conditions remain favorable for higher risk asset prices.

Then, there's the Fed.

The central bank has been fully accommodative for several quarters, so this narrative is nothing new. It was interesting earlier how several Fed governors hinted that backing off Treasury purchases or even hiking the Fed Funds rate could be in play if inflation levels remain elevated. The market got a little spooked for a while, but the talk was quickly walked back and the accommodative stance returned.

The Fed has been very careful at not saying anything to rock the boat and this appears to be another one of those cases. Again, we'll see what happens with inflation, but the Fed for now is sticking to its guns and the market has always reacted positively to loose conditions.

How To Add High Beta Stocks To Your Portfolio

The most straightforward play would be the $2 billion Invesco S&P 500 High Beta ETF (SPHB), which consists simply of the 100 stocks from the S&P 500 with the highest beta over the past 12 months.



While SPHB would be more of a straight high beta play, you could also overweight small-caps here. The iShares Russell 2000 ETF (IWM) covers the entire small-cap market, although you could go for something like the Vanguard Small-Cap Growth ETF (VBK) if you want to add a little more pop. If you're looking for a bit of a momentum tilt as well, consider the Invesco DWA Small-Cap Momentum ETF (DWAS).

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