ETFs: alpha-beta soup
http://finance.yahoo.com/etf/browser/rk?c=0&k=6&f=0&o=d&cs=1&ce=64
I hope this ETF link works. I ordered the ETFs by their Alpha and went down the list looking for low Beta for some hedge ideas. (predictably, high beta with high alpha were Emerging markets and Resource ETFs. nothing wrong with them, they're just not a hedge right now).
Low and behold I found some Utilities (XLU, VPU, IDU) with beta~0.4 with alpha above 10, and found some Consumer Staples (VDC, XLP) with beta~0.5 and alpha~5. When you look at the holdings for XLP (http://finance.yahoo.com/q/hl?s=XLP) you see some great names like PG, MO, KO, WMT, and BUD! Yes, alpha and beta are backward metrics, but look at their graphs relative to the S&P Index to see they have really made the difference in the last 2 months!
And then compare those against the Consumer Discretionary ETF XLY (with names like HD, TGT, DIS, TWX) over the last 6 months, you see a 25% net differential.
Of note, I also like Global Telecommunications IXP as a utility with a major telco in every region(T, VOD, AMX, TEF, BT, FTE, DTE, China Mobile).
At this point, I think XLP is the way to play a volatility hedge. Let me know soon, I think we have a short day of trading on Monday.
posted by Junk Bonds @ 12/31/2007 12:19:00 AM
3 Comments:
Good sleuthing. I'm glad you looked into it. XLP or IDU would be fine with me. We should have a target sell price in mind for this hedge play. Also if better ideas arise, then we should look at trimming this down as we don't have the same medium to long term play as LLL or SLB.
Alright, I put in a buy order for 100 XLP's at $28.85. With fees, total should come in just under $2900; a good size for a hedge. Leaves us another $2900 for a little bottom fishing. Rather than a target sell, I think we sell when we see that the market volatility is almost over, and we see a better way to make money.
Happy New Year guys!
I am just back to warm and beautiful Toronto ;)
I browsed through the recent posts. I should say that you had much more productive time here than me! I like this ETF analysis. I prefer XLP (staples) over IDU (utilities) for our particular “hedging” purpose. Although utilities had larger alpha in the past, but in general they should have larger correlation with the market. So I think staples like KO and BUD should be a better hedge during the market volatility.
About selling strategy, perhaps we can treat this ETF just like cash. Hold it as long as the markets are volatile and we don't have better ideas. Simply sell it when new opportunities emerge...
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