Tag Archives: alternative

Health Care ETF: XLV No. 2 Select Sector SPDR In 2014

Summary The Health Care exchange-traded fund finished second by return among the nine Select Sector SPDRs in 2014. As it did so, the ETF posted the second best annual percentage gain in its 16-year history. Seasonality analysis indicates the good times may continue rolling in the first quarter. The Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) was ranked No. 2 in 2014 by return among the Select Sector SPDRs that carve the S&P 500 into nine slices. On an adjusted closing daily share price basis, XLV ballooned to $68.38 from $54.64, a swelling of $13.74, or 25.15 percent. As a result, it behaved better than its parent proxy SPDR S&P 500 ETF (NYSEARCA: SPY ) by 11.68 percentage points and worse than its sibling Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) by -3.59 points. (XLV closed at $70.84 Thursday.) XLV ranked No. 4 among the sector SPDRs in the fourth quarter, when it led SPY by 2.50 percentage points and lagged XLU, the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) and the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) by -5.79, -1.25 and -0.86 points, in that order. However, XLV ranked No. 8 among the sector SPDRs in December, when it performed better than the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) by 0.78 percentage point and worse than SPY by 1.15 points. Overall, XLV posted the second best annual percentage return in its 16-year history: Its record was set in 2013, when it astounded by skyrocketing 41.41 percent. Figure 1: XLV Monthly Change, 2014 Vs. 1999-2013 Mean (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance . XLV behaved a lot better in 2014 than it did during its initial 15 full years of existence based on the monthly means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year’s weakest quarter was the third, with a relatively large negative return, and its strongest quarter was the fourth, with an absolutely large positive return. Inconsistent with this pattern, the ETF had excellent gains each and every quarter last year. Figure 2: XLV Monthly Change, 2014 Versus 1999-2013 Median (click to enlarge) Source: This J.J.’s Risky Business chart is based on analyses of adjusted closing monthly share prices at Yahoo Finance. XLV also performed a lot better in 2014 than it did during its initial 15 full years of existence based on the monthly medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year’s weakest quarter was the third, with a relatively small negative return, and its strongest quarter was the fourth, with an absolutely large positive return. Meanwhile, there is a historical statistical tendency for the ETF to do well in Q1. Figure 3: XLV’s Top 10 Holdings and P/E-G Ratios, Jan. 8 (click to enlarge) Note: The XLV holding-weight-by-percentage scale is on the left (green), and the company price/earnings-to-growth ratio scale is on the right (red). Source: This J.J.’s Risky Business chart is based on data at the XLV microsite and FinViz.com (both current as of Jan. 8). The health-care sector in general and XLV in particular progressed from a sweet spot to a sweeter spot to an even sweeter spot between June 2012 and October 2014. As discussed elsewhere previously, it appears XLV’s share price was driven by these key factors: Obamacare: The Affordable Care Act’s constitutionality was established in the landmark National Federation of Independent Business v. Sebelius decision handed down by the U.S. Supreme Court June 28, 2012, as documented by the court. Quantitative Easing: The Federal Open Market Committee announced the launch of the U.S. Federal Reserve’s latest QE program Sept. 13 the same year, as noted in “SPY, MDY And IJR At The Fed’s QE3+ Market Top.” Sector Rotation: A signal for such rotation, the beginning of the end of the Fed’s QE3+ program was announced by the FOMC Dec. 18, 2012, as pointed out in “Building A Martin Zweig-Like Fed Indicator Integrating Innovations Of The 21st Century.” The FOMC announced the completion of asset purchases under the QE3+ program last Oct. 29, so QE will not be a key driver of XLV in the first quarter. However, the other two factors may continue to be in play. A big risk to XLV and its constituent companies is the Obamacare-related King v. Burwell case currently before the U.S. Supreme Court. The justices most likely will hear arguments in March, according to the SCOTUSblog . They are expected to deliver a decision by July, with the ruling constituting a binary event for the Health Care ETF, as follows: If the decision is favorable to Obamacare, then its effect on XLV’s share price may be relatively small and short lasting. One analog might be the move in SPY between Dec. 17 and Dec. 29, associated with the FOMC statement on the former date. If the ruling is unfavorable to Obamacare, then its impact on XLV’s share price may be absolutely large and long lasting. One analog might be the move in the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) from June 20 to the present, associated with the crude oil price attaining either a long term or a cycle peak on the former date. Incredibly, the health-care sector’s and XLV’s awesome performances the past couple of years have not resulted in too many absurd valuations, as indicated by the above chart (Figure 3) and numbers reported by S&P Senior Index Analyst Howard Silverblatt, Dec. 31. At that time, Silverblatt indicated the P/E-G ratio of the S&P 500 healthcare sector was 1.38, which may look a little dear to growth and value folks like me but a lot cheap to normal people. Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.

Positioning For An Oil ETF Rebound? Watch For Contango

Some may consider an Oil ETF to play a rebound in prices. Investors should consider the effects of the underlying market on a futures-based ETF. Potential alternatives to play a recovery in the oil market. As crude oil prices dip to fresh lows, contrarian traders are becoming increasingly antsy for a rebound. Traders may try to tap into an oil-related exchange traded fund to capitalize on a potential recovery, but one should first look under the hood and understand how the futures market can affect an ETF. For instance, many would likely turn to the United States Oil ETF (NYSEArca: USO ) , which tracks West Texas Intermediate crude oil futures, to play a potential turn in the energy market. USO is the largest and most popular oil-related ETF option on the market, with $1.2 billion in assets and $387 million changing hands daily, according to Attain Capital . However, oil traders should be aware that USO tracks front-month WTI future contracts and the underlying oil market is currently in a state of contango. Consequently, USO could experience a negative roll yield when rolling a maturing futures contract. Contango occurs when the price on a futures contract is higher than the expected future spot price, which creates the upward sloping curve on future commodity prices over time. Essentially, the phenomenon reflects a current spot price that is lower than the futures price. For instance, WTI futures were trading around $48.2 per barrel Tuesday for the February 2015 delivery, but contracts with a later delivery are trading higher, with contracts for December 2015 delivery at $55.1 per barrel. Commodity prices are typically higher in the future because people would rather pay a premium to have the commodity on a later date instead of paying the costs for storage and the carry costs for buying the commodity right now. While this phenomena is a normal occurrence in the futures market, contango can have a negative effect on ETFs. Specifically, ETFs that hold futures contracts sell the contracts before they mature and purchase a later-dated contract. In a contangoed market, the ETF loses money each time it rolls contracts to a costlier later-dated contract – the fund would technically sell low and buy high. Consequently, long-term investors may notice underperformance to the oil market since the ETF holds front-month contracts and would see a slight cost when rolling each front-month contract . According to Attain Capital: This is why USO has drastically underperformed the “spot price” of Oil over the past five years, with USO having lost -39% while the spot price of Oil went UP 48%. It is like an option or insurance premium – a declining asset with all else held equal. Alternatively, the PowerShares DB Oil ETF (NYSEArca: DBO ) and the United States 12 Month Oil ETF (NYSEArca: USL ) provide exposure to WTI oil, but include a different weighting methodology to limit the negative effects of contango. DBO can include contracts as far out as 13 months and dump contracts at any point. USL, on the other hand, ladders 12 months of contracts to diminish the effects of backwardation and contango. Additionally, Attain Capital suggests buying the energy industry ETF , such as the Energy Select Sector SPDR ETF (NYSEArca: XLE ) to capitalize on a potential rebound since companies have other factors that don’t relate to oil prices. More aggressive traders can fuel bets with leveraged energy funds, like the Direxion Daily Energy Bull 3X Shares ETF (NYSEArca: ERX ) , which takes the 300% performance of energy stocks on a daily basis. Investors can also look at the hammered alternative energy stocks, like Tesla (NASDAQ: TSLA ), which has been out of favor since lower oil prices make green energy plays seem less viable. The Market Vectors Global Alternative Energy ETF (NYSEArca: GEX ) and the First Trust NASDAQ Clean Edge Green Energy Index ETF (NasdaqGS: QCLN ) both include heavy tilts toward TSLA and other clean energy picks. Max Chen contributed to this article .

Where Is The Market Going? Separating The Signal From The Noise

No one “knows” where the market will close tomorrow, let alone this year. That doesn’t stop gurus, seers, and writers from telling us which indicators will give us that inside edge. Read enough of them — or even two — and you realize you’re right back where you started. Instead, just concentrate on these important questions for your portfolio strategy. Journalists have to write x number of stories every week to fulfill their contracts. That doesn’t mean you have to read them and, if you still find amusement in so doing, it doesn’t mean you have to act on their advice. Thank heavens. Case in point. At 6:56 p.m. EST on January 6th, Mark Hulbert posted this piece on Marketwatch.com: “Opinion: A bear market in stocks just became more likely .” The gist of the article was summed up neatly in his first two sentences: “Bad news, investors: The Dow Industrials’ 300-plus-point drop Monday markedly increases the likelihood that the bull market has neared its end – if it hasn’t already. That’s because the stock market’s performance in the first two trading days of January has a surprisingly good record of forecasting the direction for the next 12 months.” Mr. Hulbert goes on to describe his pleasure at discovering this new tool, which is even better, he believes, than using the first five days of January as a tool to decide whether to consider investing for the year, and to note that the 1.8% decline in the first two trading days of 2015 were “even bigger than the 1.6% decline the Dow posted over the first two days of 2008, a fateful year that would later experience the worst bear market since the 1930s.” Give’s one pause, doesn’t it? Ah, but hot on the trail of this article comes one the very next day from Reuters titled, ” Here’s What Happened Those Other Times The S&P 500 Started the Year With 3 Down Days. ” The distinction is important, you see – this “indicator” uses the first three days of the new year, not merely the first two. Reuters’ Myles Udland reports on an e-mail sent by Jonathan Krinsky of MKM Partners that says, “During the eight years since 1928 that the S&P started with three-day losing streaks the index has returned 8.36% on average,” better than all years for the S&P since 1928. Well, there you have it. Since Mr. Hulbert’s data goes back to 1896 and Mr. Krinsky’s only until 1928, we are forced to draw one of two conclusions: There were a preponderance of less-than-pleasant market years prior to 1928 that began with 2 down days the first two trading days of the year, or It just doesn’t matter. I am firmly in the latter camp, call it the “Who Cares?” camp. What actionable offensive might an investor take armed with this information? I suppose if one were schizophrenic enough, they could have gone to cash after the second day and rushed back in the fourth day (after the “first 3 days” had passed.) But, really now, who makes their lifetime investing decisions like this? (I know, I know; more than I’d care to imagine.) Forget the First 2 Days / First 3 Days / First 5 Days Indicators and ask yourself this: Does the macro-economic and geopolitical environment favor the geographic and political regions in which you are investing? Are the sectors you favor undervalued or, if you anticipate superb results based on the first question, are they at least currently fairly valued? Do you currently have the appropriate mix of asset classes and individual funds, bonds and stocks to benefit from (or defend against) the market the first two questions lead you to invest in? Then, as the famous investment guru Aaron Rodgers recently said, “R-E-L-A-X.” Invest rationally. Read fewer articles written breathlessly about tea leaves, bones in a circle, or statistical correlation. There may be more kittens born in January than other months, too. Does that mean we should faithfully track the number of kittens born this month? Of course not; correlation does not mean causation. Sometimes it doesn’t mean anything at all… ________ As Registered Investment Advisors, we believe it is our responsibility to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year. We encourage you to do your own due diligence on issues we discuss to see if they might be of value in your own investing. We take our responsibility to offer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.