A recent post from Barron’s attempts to compare the performance of PowerShares S&P 500® Low Volatility Portfolio (ticker SPLV) to that of PowerShares S&P 500® High Beta Portfolio (SPHB). In doing so, the post uses charts of price returns of these exchange-traded funds (ETFs).

First, given that both ETFs had dividend distributions and at disparate levels (12-month yield of 2.76% for SPLV and 0.75% for SPHB, according to Morningstar), a comparison of total instead of price returns would be more appropriate.

Second, the comparison does not take into account the volatility of either ETF. The simplest approach to do that would be to use a Sharpe Ratio (SR) for both funds. Unfortunately, since these funds have been in existence for only a little more than two years, the SR and standard deviation (SD) figures are not yet available (typically, they are only calculated for funds older than three years). So, here are the results derived from the available monthly return data since May 2011:

SPLV SPHB SPY
SR vs. TB 0.44 0.07 0.27
SR vs. SPY 0.02 -0.13 0.00
SD 8.73% 25.94% 13.28%

Traditionally, SR is calculated using a risk-free rate; in the above table, TB stands for the 4-week Treasury Bill, the interest rate of which is appropriate because monthly returns of ETFs are used. However, an ex-post SR can also be calculated using an arbitrary benchmark; in this case, returns of the SPDR® S&P 500® ETF (SPY) were used.

The above results clearly demonstrate that over the most recent two-year period, SPLV exhibited a return/risk performance superior to that of either SPHB or SPY. However, only time will tell if this outperformance persists in the future.

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