Are High Beta Stocks Like Call Options?

In the last days of 2012 we penned an article describing the current situation of the market as follows: "Margin Debt Soars To 2008 Levels As Everyone Is "All In", Levered, And Selling Vol." Today, Bloomberg catches up with this rather critical topic, and confirms that the buying power by the biggest marginal traders left in the market who do not recycled

By Michael Johnston:PowerShares, one of the pioneers of the factor-driven ETFs, announced this week an expansion of its suite of international products. The company has rolled out two new ETFs that will target high beta stocks in international stock markets, giving investors new tools for amplifying their exposure to volatile equities in markets beyond the U.S.

A suggestion from a number cruncher: Avoid Manulife Financial, Lundin Mining, Precision Drilling, Capstone Mining and First Quantum Minerals. On the other hand, buy Keyera Corp., Enbridge Inc., Pembia Pipeline, TransCanada and Franco-Nevada. Those 10 stocks are part of a list prepared by Jeff Evans, a quantitative analyst with CIBC World Markets, determined on the basis of currency sensitivity and stock returns.

By Eric Falkenstein: Eugene Fama states that the low volatility anomaly is really just the excess return low beta, and this has been well known for 50 years. I think it's indisputable that low beta underperforms high beta, but I guess that's a fun fact of contention. It's fun to find yourself on the minority side of a fact you think others don't agree with.

By George Fisher: Many investors think about utility stocks and say, “Why bother? Just hand me those high beta stocks, I need my speculative capital gains fix.” Investing in utility stocks, however, accomplishes several important portfolio investment strategies. As one of the ten S&P industrial sectors, utility companies represent a vital segment of the economy that is somewhat cyclical in nature, while providing investors stability of earnings and dividend income.

Philip W., a loyal MR reader, asks:

Eric Falkenstein submits: The key to the dominance of low volatility equities is that high volatility stocks are bad investments on the two main dimensions of stock-worthiness: volatility and return. Volatile stocks by definition have high volatility, and also high correlation with the overall market (CAPM beta) and the business cycle. They all have below average returns. So why do so many people like them?

Michael Johnston submits:After announcing earlier this month that it plans to shutter ten ETFs by the end of the year, PowerShares continues to push ahead with plans for additional innovations in the ETF space. The Wheaton, Illinois-based firm recently filed details with the SEC for a line of ETFs linked to S&P indexes built around various investment strategies, including beta, momentum, and volatility.