3 Low Beta ETFs For The Uncertain Market (LBTA, SLBT, XLBT, T, WMT, UNS, VGR, BIIB, SAFM, VOD)

Eric Dutram: The economy is clearly in the doldrums and the equity markets are bearing the brunt of the malaise, as investors are hunkering down in bonds and cash at this time. Lingering economic concerns, the deepening Euro-zone debt crisis, a dismal U.S. job scenario and threats of political turmoil in Greece have put equity returns at risk, not only for the short term but also for the balance of 2012.

In this backdrop of uncertainty, investors are seeking exposure to alternative sources of income rather than equity and bonds. For these investors, an allocation to low beta funds could be the safest bet, so long as the disorder persists. (Read: Three Low Beta Sector ETFs)

Concept of ‘Beta’

Beta is a good measure to identify risks associated with funds/stocks. It measures the price volatility of the stocks/funds relative to the overall market. The beta has a direct relationship with the market movements. In other words, a stock with a high beta will be more volatile than the market while a lower beta stock or fund will be less volatile than broad markets.

Generally speaking, a beta of 1 indicates that the price of the stock/fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move more than the broader market and is extremely volatile, while a beta of less than 1 indicates that the price of the stock/fund is less volatile than the market.

Implications of Low Beta

Let us consider a stock/fund whose beta is less than 1, say 0.8. If the market goes down by 5%, the price of the stock/fund will fall by only 4%. Meanwhile, if a beta is 0.5, that means that the stock or fund in question is going to move, on average, half as much as the broad market.

In the present economy, investors should consider the low beta ETFs as these will experience lower declines in their prices in the current market turmoil. Though these have lesser risks and lower returns, the funds are considered safe and resilient in the midst of uncertainty.

Funds with low beta will often exhibit greater levels of stability than their more market sensitive counterparts and will usually lose less when the market is crumbling. However, when markets soar, these low beta funds experience lesser gains than the broader market counterparts and thus, lag their peers. (See more ETFs in theZacks ETF Center)

Given the market uncertainty in the short and medium term, investors may find low beta ETFs an intriguing option until the market track becomes clear. They can choose from the following three Russell low beta ETFs, which could be a worthy investment at this time.

Russell 1000 Low Beta ETF (NYSEARCA:LBTA)

This fund provides exposure to large cap low beta equities. Initiated in May 2011, the fund seeks to match the performance of the Russell-Axioma U.S. Large Cap Low Beta Index. The stocks in the fund have low beta as determined by a screening and ranking methodology of the Axioma U.S. Equity Medium Horizon Fundamental Factor Risk model.

The product has $25 million assets under its management and uses a replication strategy by holding 138 stocks in the underlying index. The fund also has a low level of concentration in its top 10 companies, as it puts only 20% of its assets in these firms. AT&T Inc. (NYSE:T), Wal-Mart Stores Inc. (NYSE:WMT) and Biogen Idec Inc. (NASDAQ:BIIB) are the top three holdings.

Though the fund is heavily concentrated on consumer staples and healthcare, these sectors have low betas of less than 1, thus making LBTA a low risk fund in the space. (Read: The Comprehensive Guide to Consumer Staples ETFs) The product is light on the high beta sectors such as producer durables and materials & processing. While the fund allocates nearly 75% of the assets in large cap companies, mid and small cap takes the remaining portion in the basket.

This ETF is the low cost choice in the space, charging investors a fee of 20 bps per annum. The fund is less volatile and trades with an average of 12,000 shares per day. With a beta of around 0.73, the product has delivered a decent 2.12% return year-to-date and yields 1.41% in dividends on an annual basis.

Russell 2000 Low Beta ETF (NYSEARCA:SLBT)

Initiated in May 2011, this fund implements the same strategy and methodology as that of LBTA. However, it has a focus on small caps, tracking the Russell-Axioma U.S. Small Cap Low Beta Index.

With AUM of $4.8 million, the product uses a replication strategy and holds 341 securities in the underlying index. It allocates 16% of its assets in its top 10 holdings, including UNS Energy Corp (NYSE:UNS), Vector Group Ltd. (NYSE:VGR) and Sanderson Farms Inc. (NASDAQ:SAFM) as the top three companies.

The fund is heavily exposed to financial services, followed by healthcare, consumer staples and utilities. While the financial sector generally has a higher beta of 1.42, this particular product has a great deal of exposure to REITs, which are usually less volatile than their general financial counterparts.

Meanwhile, a variety of other low risk sectors round out the rest of the product, ensuring a low volatility model for SLBT. In fact, healthcare, consumer staples and utilities sectors have a beta of 0.79, 0.57 and 0.57, respectively. (Read: Utility ETFs: Slumping Sector In Rebounding Market)

The ETF charges 30 bps in fees per year and trades in small volumes, say around 700–800 per day on average. It has generated 1.38% returns year-to-date with a relatively higher beta of 0.97. The fund also yields about 1.12% in annual dividends.

Developed ex-U.S. Low Beta ETF (NYSEARCA:XLBT)

This ETF was launched in November 2011 and seeks to match the performance of the Russell Developed ex-U.S. Large Cap Index. The stocks in the fund have low beta as determined by a screening and ranking methodology of the Axioma AX-WW 2.1 World-Wide ex-USA Equity Factor Risk Model.

The fund provides exposure to large cap equities in the international markets. (Read: Seven Biggest International Equity ETFs) A large part of the assets is skewed towards Japan, United Kingdom, Canada and Switzerland with a combined share of more than 67%. Hong Kong, Germany, Netherlands, Singapore, Bermuda and France represent a smaller market share, but are represented as well.

The product focuses on healthcare and utilities sectors that have lower beta. These two sectors combine to make up just over 35% of the total assets in the ETF.

With respect to individual holdings, the fund allocates about 19% of its assets in top 10 firms. Vodafone Group Plc (NASDAQ:VOD), Novartis AG (NYSE:NVS) and Nestle SA (NSRGF) are the top three elements in the basket.

With AUM of $4.7 million and daily trading volume of less than 2,800 per share, the fund holds 213 securities in the basket. It uses a replication strategy of the underlying index and charges a fee of 25 bps per year to investors. The fund has generated negative return of 5.42% year-to-date and currently yields an annual dividend of 0.80%.

Provided below is the summary of these three low beta ETFs:

Fund Name


AUM (in millions)

No. of Holdings

Expense Ratio

Top Sector



Year-To Date Return






Consumer Staples






















Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 DaysClick to get this free report >>

Written By Eric Dutram From Zacks Investment Research

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

Leave a Reply

Your email address will not be published. Required fields are marked *