Cathie Wood's ARK Innovation ETF is in a league of its own this year. But at least one diversified ETF is giving it a run for the money — using high beta S&P 500 stocks.
Invesco S&P 500 High Beta ETF delivered a total return this year of 20.7%, says Morningstar Direct. That makes it the No. 2 top performing actively traded diversified ETF this year. And it's only trailing ARK Innovation, which is having an amazing year so far, up 30.7%.
Invesco S&P 500 High Beta is getting the job done using large high beta stocks. High beta stocks tend to swing more wildly than the S&P 500. And they're exactly where investors want to be this year. The ETF is also betting on large and mostly profitable companies. ARK Innovation, in contrast, invests mainly in smaller companies — including some that are many years away from turning a profit.
"SPHB owns the large-cap stocks that experienced the highest recent volatility and that are poised to benefit significantly as the stock market snaps back," said Todd Rosenbluth, head of research for VettaFi. "The ETF is highly exposed to cyclical sectors like information technology and consumer discretionary."
Risk Is On With ETF Investors
Conditions are right for S&P 500 investors to get aggressive again, Rosenbluth says.
"As U.S. inflation slows down, investors have been more confident that the Federal Reserve will continue to slow its rate hiking program and equity risk-taking will again be rewarded," he said.
And that's why many investors are pouring back into ETFs like ARK Innovation and Invesco S&P 500 High Beta again. Following the 19.5% beating they took in the S&P 500 last year, due to rising inflation and interest rates, now's the time to make some of those losses back, they figure. The S&P 500 is up 8% already this year.
Seeking High Beta
Invesco S&P 50o High Beta is filled with many of the kinds of stocks that suffered most last year. Interestingly, Tesla, which doubled from the lows and is a key holding for ARK Innovation, isn't a top holding for Invesco S&P 500 High Beta.
Instead, the largest high-beta position is computer-chip designer Nvidia at a 2% position in the portfolio. Shares are up more than 55% this year.
The company checks all the boxes for risk. Shares tanked more than 50% last year. And the stock's five-year beta is 1.79, says S&P Global Market Intelligence. A beta of 1 means the stock is equally volatile to the S&P 500. So at 1.79, Nvidia is 79% more volatile than the market.
And the high-beta ETF's next highest position is one of the S&P 500 stocks that gave investors the most vertigo last year: Meta Platforms. Shares of the online social network company plunged 64% last year, knocking it out of the top 10 most valuable firms. It has an elevated beta of 1.22. But it's up more than 46% this year.
More Options For High Beta
Investors looking to join the high beta party this year, though, have more options.
Simply betting on high beta S&P 500 sectors will expose investors to many of the same stocks, Rosenbluth says. He points to Vanguard Information Technology and Consumer Discretionary Select Sector SPDR as two low-cost ways to own the higher volatility sectors of the market.
And if you're looking for something more dynamic, Rosenbluth says Pacer Lunt Large Cap Alternator ETF is worth a look. The ETF shifts between high beta and low volatility stocks within the S&P 500 based on the market's direction. So it will move with the market, if the high-beta rally ends.
"It shifted to high beta in February after the last four months focused on low volatility," he said.
High Beta, High Returns?
Top holdings of Invesco S&P 500 High Beta ETF
| Company | Ticker | Portfolio weight | Year-to-date ch. | 5-year beta |
|---|---|---|---|---|
| Nvidia | 2.0% | 55.3% | 1.79 | |
| Meta Platforms | 1.7 | 46.9 | 1.22 | |
| Align Technology | 1.7 | 60.4 | 1.62 | |
| Advanced Micro Devices | 1.6 | 30.7 | 1.98 | |
| Monolithic Power Systems | 1.6 | 49.1 | 1.17 | |
| Etsy | 1.6 | 19.1 | 1.86 | |
| Carnival | 1.5 | 50.3 | 2.23 | |
| Onsemi | 1.5 | 38.3 | 1.76 | |
| Royal Caribbean Cruises | 1.5 | 52.8 | 2.49 | |
| Caesars Entertainment | 1.4 | 28.6 | 2.88 |
Sources: IBD, S&P Global Market Intelligence, Invesco
Follow Matt Krantz on Twitter @mattkrantz
