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Motif Spotlight: Low Beta Looks to Offer a Stable Ride

7 December 2012 in Trading Ideas

Volatility isn’t always a bad thing for investors. Its spike toward the end of 2011 actually coincided with the beginning of a stock market rally of about 30% that culminated in September 2012.

Investors are now seeing another slight uptick in equity volatility (as measured by the VIX volatility index), but given that the market is down 3.5% in the past 10 weeks, and is essentially flat since mid-March, the appetite for more swings isn’t necessarily what it used to be.

For some investors, this has resulted in moving part of their portfolios out of equities altogether and into fixed-income, which has become a relatively popular move this year, according to fund flow data.

But many investors still want the equity exposure without the wild swings that may be coming in the short term. For them, a look into low-beta stocks may be an attractive option.

“Beta” is a measure of a stock’s movement relative to the rise or fall of the broader market. A measure of 1 means a security moves with the market, while a beta of 1.2 means a stock is 20% more volatile than the market.

The newest motif, Low Beta, is a collection of stocks constructed for their measures of both low beta and low volatility, compared with the broader market. Since utilities stocks are frequently among the lowest-beta options, a little more than half of the motif is weighted with stocks from that segment, including Duke Energy (DUK), Southern Co. (SO) and PG&E (PCG).

Another one-fourth of the motif’s weighting comes from the consumer segment, including Wal-Mart (WMT), Kimberly-Clark (KMB) and General Mills (GIS).