3 Negative Beta ETFs For This Rough Market

The contraction in the U.S. economy in the first quarter of 2015, slightly overvalued status of the broader equity market and soft corporate performance do not make this a great time to invest in risky securities. Though the second-quarter data so far point to a rebound from the winter gloom, the revival is still fragile. The investing world and most importantly the Fed might be looking for some more strength in the economy to tout it as strong.

The data points released so far in Q2 show that the housing, job and inflation part of the economy are satisfactory while consumer confidence dropped to a six-month low in May. Retail sales, one of the key gauges of economic well being, came in at the weaker side in the first quarter despite the tailwind of low energy prices. The U.S. manufacturing sector also lacked luster.

In this baffling backdrop, only one factor that can propel the market is the delayed Fed rate hike. Mixed economic readings pushed back the start of the Fed tightening cycle to September at the earliest. Moreover, the Greek debt debacle and volatility in Chinese shares added to the woes.
Amid fears of uncertainty, very few remain fully invested in equities while many are resorting to some alternative routes. Despite this volatility, some investing corners have been relatively stable over the past one month thanks to their underlying strength and low risk quotient.  

What is Beta of a Portfolio?

Beta is a good gauge to spot risks associated with funds/equities/bonds. It measures the price volatility of the stocks/funds relative to the overall market. A security with a high beta is likely to be more volatile than the market and vice versa.

Generally speaking, a beta of 1 specifies that the price of the security is likely to shift in line with the broader market. If the beta value of a security is more than 1, the security would be more volatile than the broader market or vice versa, as per investopedia. Investors could also look at negative beta which shows an opposite relation to the broader market.

Investors should note that, the market median of beta (one year) is 0.96, as per Fidelity. If volatility continues to have an upper hand in the market, investors might consider products with negative beta.

Below, we have highlighted three negative-beta ETFs that have gained considerably in the past one month, and could be in focus if the current trend continues. However, investors should note that when the market follows an upward trajectory, these low beta funds witness lesser gains than the broader market.

Credit Suisse Merger Arbitrage Index ETN (CSMA) – beta negative 0.58

This $7-million ETN looks to provide investors exposure to a merger arbitrage strategy by tracking the Credit Suisse Merger Arbitrage Liquid Index. This index tracks a dynamic basket of stocks held as long or short positions that focus on publicly announced merger and acquisition transactions (read: Bet on M&A Frenzy with These ETFs and Stocks).

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