Tag Archives: etf

FBT Was +47.55% In 2014 And +10.00% YTD. Will The Returns Continue In 2016?

Summary This established Biotech ETF has an interesting structure but also is quite volatile. With $3.28BLN in assets, will the institutions continue to invest in 2016? We answer these questions and provide our recommendation on this top performer. The First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA: FBT ) is an equal weighted passively managed fund with an established track record, (inception 06/19/2006). The fund seeks to replicate as close possible, before fees and expenses, the price and yield of the NYSE Arca Biotechnology Index, (previously the Amex Biotechnology Index). The interesting structure of the ETF is the 30 components, (previously 20 components prior to October 20, 2014). What is challenging for shareholders is the quarterly rebalancings that occur in late January, April, July and October. Due to the equal weighting objective of the Fund and the underlying Index and the general small to mid-cap nature of the sector, these rebalancings and the ETF, in general, can be volatile. We will analyze the structure of the ETF, its holdings, performance and fees and provide our recommendation. 100% of the ETF is in common equity holdings. Our Market Cap is quite simple, with most of our sources agreeing: FBT Market Capitalization Market Cap Weight Mid cap 34.98% Small cap 33.10% Large cap 31.98% These numbers were courtesy of Fidelity, with xtf.com extremely close in agreement. Morningstar, as we previously noted uses a slightly difference nomenclature. Their breakdown is: Medium at 40.56%, Small at 27.19%, Large at 23.12%, and Giant at 9.12%. Categorically we can state that the majority of the firms in this ETF are small to mid-cap firms with limited products presently, if any, in the marketplace. In terms of the style of the underlying components, it is quite clear to investors who have participated in this space. FBT Ownership Style Style Weight Growth 59.80% Pure Growth 30.00% Blend 7.10% Value 3.10% Without a doubt this ETF is a growth vehicle and not intended for those seeking value investments. Morningstar states that the ownership style is mid or medium and is considered high growth. In terms of currency and countries of the holdings it is somewhat interesting. FBT Country and Currency Exposure Country Weight Currency Weight United States 89.90% United States dollar 89.90% Ireland 3.68% Euro 10.10% Spain 3.23% NA NA Netherlands 3.19% NA NA Our country and currency exposure here is clearly US geographically focused with some Eurozone exposure as noted. The 10.10% euro weighting will not adversely impact this ETF even with the euro possibly moving below dollar-euro parity. As such, we have no issues with the underlying geographical or currency weightings. It is quite clear that the overall sector is 100% healthcare in FPT. The industry exposure is informative. Industry Weight Biotechnology 79.27% Life Sciences Tools & Services 16.29% Pharmaceuticals 4.47% While this is in no way diversified, it does show that there are companies within the ETF which are not pure biotech, but are grouped within the fund. Some of them we do recognize from previous research and there is one firm that we previously analyzed and recommended. We will discuss this firm when we review the holdings. In terms of the holdings, as usual we will analyze the top 15 components, their symbols, ratings, (Moody’s and S&P), if any, and their weight within the ETF and the underlying index {BTK}. In this fund’s case we will also show their individual year to date and 12 month performance. FBT top 15 holdings Name/Symbol YTD perf/ 12 month Ratings, (Moody’s/S&P) Weight-BTF Weight- Index, {BTK} Nektar Therapeutics (NASDAQ: NKTR ) 0.71%/-3.27% NR/NR 4.47% 3.33% Dyax Corp. (NASDAQ: DYAX ) 165.50%/168.18% NR/NR 4.10% 3.33% Isis Pharmaceuticals, Inc. (NASDAQ: ISIS ) -7.92%/-0.25% NR/NR 4.09% 3.33% Alnylam Pharmaceuticals, Inc. (NASDAQ: ALNY ) 0.74%/-8.18% NR/NR 3.93% 3.33% United Therapeutics Corp. (NASDAQ: UTHR ) 20.08%/16.21% NR/NR 3.78% 3.33% Celldex Therapeutics Inc. (NASDAQ: CLDX ) -16.33%/-17.19% NR/NR 3.70% 3.33% Alkermes, PLC (NASDAQ: ALKS ) 22.49%/22.62% Ba3/BB 3.68% 3.33% Illumina, Inc. (NASDAQ: ILMN ) -4.60%/-7.27% NR/BBB 3.64% 3.33% Charles River Laboratories International, Inc. (NYSE: CRL ) 18.73%/18.41% Ba2/BBB- 3.57% 3.33% Novavax, Inc. (NASDAQ: NVAX ) 36.09%/46.99% NR/NR 3.48% 3.33% Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN ) -3.18%/-9.12% NR/NR 3.35% 3.33% Myriad Genetics, Inc. (NASDAQ: MYGN ) 25.54%/21.89% NR/NR 3.35% 3.33% Vertex Pharmaceuticals Inc. (NASDAQ: VRTX ) 2.52%/2.02% NR/NR 3.35% 3.33% Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN ) 33.24%/25.67% Baa1/NR 3.32% 3.33% Amgen Inc. (NASDAQ: AMGN ) -0.62%/-5.91% Baa1/A 3.24% 3.33% The top 15 holdings represent 55.05% with an average of 3.67%, with the bottom 15 totaling 44.96%. This was expected with the equal weighting of the ETF. Unlike the index which is even at 3.33% or 1/30 for each holding, the ETF is adjusted for share price and an equal value. Based upon the individual performance of the top 15 holdings, it is fairly obvious that returns are not reasonably predictable without extensive analysis of each company, their future products and FDA approval developments. The equal weightings here do provide an opportunity of participating in one of the top performers, such as Dyax Corporation with a 165.50% return YTD. Obviously, the return on Dyax far outweighs the negative return of a firm such as Celldex Therapeutics at -16.33% YTD. The benefit of the ETF allows participation in a sector where returns can be quite diverse from one firm to another. In terms of credit ratings, only 14.13% (S&P) of the top 15 have ratings and only 25.66% of these 15 holdings. It is quite apparent that with the rapid growth and negative balance sheets of these firms, the majority of the firms are mostly lower grade credits, if rated at all. Only Illumina, Inc., Charles River Laboratories International, Inc and the well known Amgen Inc. are investment grade, as per S&P. One of the firms in the ETF with a weighting of 2.91% is our personal favorite, Quintiles Transnational Holdings, Inc (NYSE: Q ), a company we had previously analyzed and recommended. Quintiles is the leader in {CRO} services or a Contract Research Organization. The company basically performs many of the services that large pharmaceuticals and Biotech firms require to bring their product to market and to continue to develop new and existing products. This would include Consulting Services, Portfolio and Strategy Planning, Clinical Trial Execution, Laboratories, Real-World and Late Stage Trials, Technology Solutions, Patient and Provider Engagement, Product Marketing and Sales. We are a little surprised to see it in this ETF. It is a profitable and quite a large capitalized firm, yet it will continue to grow and profit as long as there is a need for their services from the healthcare sector. As such, we think it is a great way to participate in the overall growth of the firm (14.51% YTD/18.26% 12 month) balanced with the performance of the other holdings in the ETF. Based upon the components and structure we analyzed the overall performance of the ETF and the index. FBT’s Performance, Fees and Recommendation Category FBR {ETF} BTK {Index} Net Expense Ratio .58% NA Turnover Ratio 58.00% NA YTD Return 9.94% (11/30/15) 5.99% (12/07/15) 10.66% (11/30/15) 5.48% (12/07/15) 1-Year Total Return 10.08% (11/30/15) 5.56% (12/07/15) 10.79% (11/30/15) 5.58% (12/07/15) Dividend Yield/SEC Yield 0.17%/-0.43% NA Beta (Shares/Holdings) 1.13/.70 NA P/E Ratio FY1/current 29.60/26.93 NA Price/Book Ratio FY1/current 8.00/7.06 NA Our expense ratio is in-line with the asset class median of 0.53% and is quite acceptable. Our turnover ratio is only slightly surprising here. With an asset class median or 18.00%, we expected much higher. One of the reasons is the general nature of the sector and the rules of the ETF and the underlying index that cause firms to be replaced. According to the NYSE Arca: Components will be removed from the index during the quarterly review if they fail any of the criteria below: (1) Current Market Capitalization is lower than $900 million (2) The Average Daily Traded Value for the past 3 Months is lower than $900,000 (3) The Current Last Traded Price is less than $1.00 In addition, various corporate actions may cause the stocks in the index to be substituted. As there has been M&A activity and various other corporate actions in the sector over the past year, the high turnover ratio is to be expected here. In terms of the ownership of the ETF, it is readily apparent that institutions and funds hold large holdings. While Wells Fargo (NYSE: WFC ) holds 6.31% and Morgan Stanley Smith Barney LLC (NYSE: MS ) holds 8.81%, the big surprise holding is another ETF that we previously analyzed and recommended. The First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ), holds 33.99% of the total shares in its ETF or 24.20% of the total assets. The ETF has performed well due to its allocation in FBT, among others. FBT will continue to attract institutional shareholders and advisory clientele who seek allocation to the Biotech sector, regardless of economic conditions. In terms of economic conditions, many consider Biotech as being within the Pharmaceutical and medical space and defensive. We tend to agree, yet the cost of capital for the industry is always a concern. With interest rates set to rise this may be an issue for those firms which tend to borrow heavily to fund R&D. As such, though we are impressed with the performance over the past year the ETF is not for the squeamish. It is noted above that the YTD performance has dropped 4.00% since the end of November. The sector and its holdings are not for investors who are looking for the short term. A dollar cost strategy may be appropriate for investors who are familiar (or not familiar) with the frequent market routs. In terms of FBT the year high on July 20,2015 was $132.21 representing at that time a 28.96% YTD return, while the year low of $64.08 set on August 24,2015, after the Asia sell off, represented a loss of -37.49% YTD at that time. Overall, the volatility of the sector has not dissuaded institutional investors, (or speculators for that matter) from participating in this ETF or the sector. As the second largest biotech ETF, after the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) it continues to represent an attractive vehicle to participate in a sector that will continue to produce new drugs and redevelop existing treatments. We are a strong buy on this ETF into 2016 and beyond.

Neuroeconomics And Volatility

Summary Discussion on the summer spike in volatility in relation to the three areas of neuroeconomics. How your brain and emotions affect volatility decision making. I have preached patience and the science agrees. First, thank you for reading my articles. I have great readers, as shown by the comment sections of each article and I really appreciate all of you. If you enjoy my work, please follow me on Seeking Alpha and feel free to link to or share this article. In this piece, we will look into some very interesting research in economics and how that relates to volatility. Long-Term Volatility Trends I have always asserted that the VIX is driven long term by actual and predicted economic growth and short term by a variety of factors. If you look at the long-term chart below showing the VIX Index, you will see a slight correlation to the level of volatility and the performance of the general economy that generally agrees with this theory with a couple of exceptions. (click to enlarge) (click to enlarge) Let’s state the obvious here: if the economy is doing well or expected to be doing well, then volatility will tend to be lower and vice versa. This is a longer-term view of overall volatility. However, many other short-term events will produce better opportunities to profit from spikes in volatility when using VIX futures ETFs. Neuroeconomics This is something we haven’t discussed before in regards to volatility. This field of study seeks to explain human decision making, the ability to process multiple alternatives, and to follow a course of action. Neuroeconomics textbook definition fits very well into volatility trading. To compare volatility trading to neuroeconomics, we will use Jason Zweig’s book Your Money & Your Brain as a resource. Our First Lesson Monetary losses and gains are not just pure financial and psychological outcomes. These gains and losses create a biological change which has substantial effects on the brain and body. When trading volatility, it is important to understand and plan for the potential gains and losses of a given scenario. I am sure many people reading this article had been in a trade before and wondered things such as: how the heck can this be, this is out of control, the market is dumb, people are idiots, and then why did I even make that decision. On a daily basis, I see comments on social media that lend more to the premise of impulsive gambling rather than strategic investments in volatility. Areas of the brain linked to excitement and anxiety influence our financial decision making. Those decisions can be rational or irrational in nature. The nucleus accumbens is an area of the brain that activates when we expect a reward, such as a profitable volatility trade. Financial reward will most often cause traders to make decisions based on emotions and potential outcomes rather than the evidence at hand. According to Stanford University , the nucleus accumbens is located in an area of the brain rich in dopamine which has been linked to addiction. If you are only focusing on the reward of your volatility trade, you are leaving out 75% of the equation. How can you make a successful financial decision while encouraging your brain to release dopamine? Loss Aversion Loss aversion is the theory that individuals will exhibit greater sensitivity to losses than to an equivalent gain. I recommend reading The Neural Basis of Loss Aversion in Decision-Making Under Risk. In the past several years, investors have enjoyed above-average gains for an extended period of time. This pushed inverse volatility products such as the VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV ) to new highs and leveraged long volatility products such as the ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ) to new lows. It also created pockets of writers who openly touted inverse volatility products as the best trading vehicles ever (more on those results later). Let’s view a market chart and the performance of XIV from 2011 to mid-2014. It is important to note the Y axis in this chart and that the gains in XIV would have been 10x the amount of the S&P over this period of time. Graph mainly for illustration purposes of increasing gains. You can see that a clear upward trend was in place until July of 2014. Beyond that point, the market, although making new highs, began to get choppy and growth fears began to emerge exponentially in the media. See below for July 2014 to present including the VIX Index. This chart shows the percentage of change and is separated by equity to give you a clearer picture of each instrument. VIX Spike Why would the VIX Index, and subsequently the VIX futures which affect volatility ETFs, spike to a level not seen since 2008 despite the lack of an actual recession? The answer is loss aversion. Investors were less willing to lose $5 than they were to potentially gain $5 after so many years of steady gains. Hitting the sell button is easy when you are up substantially on your original position or you fall into a growing category of investors that have never experienced a market correction. There was also no shortage of dire news stories about the economy and slow global growth, further supporting the neurological decision to avoid risk. We have previously discussed how UVXY operates and its tracking of the VIX futures. You can read more about UVXY and other volatility products in the ETF Guide . When the VIX futures were spiking this past summer, UVXY went on a tear and produced incredible gains in a short period of time. See below: (click to enlarge) During this time period, you had incredible interest in UVXY mainly coming from news features and a huge spike in social media volume. Bandwagoners looking to make a quick buck were sucked in. Some got out ahead, and others didn’t. By the time some traders realized they had made a mistake, the natural dopamine had long worn off and reality started to set in. Although unfortunate for them, these traders are an essential part of the volatility food chain in which the patient and well positioned survive. Conclusion I hope you have enjoyed this first lesson on volatility trading in relation to neuroeconomics. I look forward to bringing you more lessons as my schedule permits. To recap, we discussed how chemical and physical changes in the brain due to gains and losses on your investments influence the decision-making process. As volatility traders, we can take advantage of this information by clearly seeing through the market turmoil and making decisions based on evidence (past and present) rather than emotion. By understanding the parameters that volatility futures will trade in, the usual highs and usual lows based on the current scenario and historical figures, you can plan out your trade to encompass the three areas of neuroeconomics. By weighing all possible scenarios, you can be better prepared to follow through with your trade and increase the chances of profitability. As we have discussed, our natural instinct is to sell and save rather than to wait and gain. If I could pick the most common word out of my volatility articles here on Seeking Alpha, it would be patience and the science behind your decision making agrees. For more information on volatility trading and its related ETFs along with strategies and educational series, please check out my library here on Seeking Alpha. As always, thank you for reading!

Will $20 Crude Soon Be A Reality? Short These ETFs

Oil has been the most perplexing commodity of 2015, with big busts and occasional rises seen in a very short period of time. In particular, oil tanked to a seven-year low on Monday after the Organization of the Petroleum Exporting Countries (OPEC) failed to address the growing supply glut. Crude plunged 6% to $37.50, and Brent oil tumbled more than 5% to $40.73. What Happened? At its meeting on Friday, OPEC members decided to continue pumping near-record levels of oil to maintain market share against non-OPEC members like Russia and U.S. in an already oversupplied market. Iran is also looking to boost its production once the Tehran sanctions are lifted. As per the Iran oil minister, Bijan Namdar Zanganeh, production will likely increase by 500,000 barrels a day within a week after the relaxation in sanctions and by 1 million barrels a day within a month. Oil production in the U.S. has also been on the rise, and is hovering around its record level. Further, the latest bearish inventory storage report from the EIA has deepened the global supply glut. The data showed that U.S. crude stockpiles unexpectedly rose by 1.2 million barrels in the week (ending November 27). This marks the tenth consecutive week of increase in crude supplies. Total inventory was 489.4 million barrels, which is near the highest level in at least 80 years. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on demand outlook. Notably, manufacturing activity in China shrunk for the fourth straight month in November to a 3-year low. The International Monetary Fund (IMF) recently cut its global growth forecast for this year and the next by 0.2% each. This is the fourth cut in 12 months, with big reductions in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. That being said, the International Energy Agency (IEA) expects the global oil supply glut to persist through 2016, as worldwide demand will soften next year to 1.2 million barrels a day after climbing to the five-year high of 1.8 million barrels this year. In addition, a strengthening dollar backed by the prospect of the first interest rate hike in almost a decade as soon as two weeks is weighing heavily on oil price. This suggests that the worst for oil is not over yet, with some forecasting a further drop in the days ahead. Notably, the analyst Goldman and OPEC predict that crude price will slide to $20 per barrel next year. How to Play? Given the bearish fundamentals, the appeal for oil will remain dull in the coming months. This has compelled investors to think about shorting oil as a way to take advantage of the strong dollar and commodity weakness. While futures contract or short-stock approaches are possibilities, there are host of lower-risk inverse oil ETF options that prevent investors from losing more than their initial investment. Below, we highlight some of those and the key differences between them: PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) This is an ETN option, and arguably the least risky choice in this space, as it provides inverse exposure to WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil, which measures the performance of the basket of oil future contracts. The note is unpopular, as depicted by its AUM of $17.2 million and average daily volume of nearly 20,000 shares a day. The expense ratio came in at 0.75%. The ETN gained 17.5% over the last 4-week period. ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $126.8 million in its asset base, and charges 95 bps in fees and expenses. Volume is solid, as it exchanges nearly 1.3 million shares in hand per day. The ETF returned 38.8% over the last 4 weeks. PowerShares DB Crude Oil Double Short ETN (NYSEARCA: DTO ) This is an ETN option providing 2x inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude, which tracks the short performance of a basket of oil futures contracts. It has amassed $67.1 million in its asset base, and trades in a moderate daily volume of around 59,000 shares. The product charges 75 bps in fees per year from investors, and surged about 34% in the same time frame. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) This product provides 3x or 300% exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. The ETN is a bit pricey, as it charges 1.35% in annual fees, while it trades in heavy average daily volume of 1.6 million shares. It has amassed $174 million in its asset base, and has delivered whopping returns of nearly 61% in the trailing four weeks. Bottom Line As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing, when combined with leverage, may make these products deviate significantly from the expected long-term performance figures (see all Inverse Commodity ETFs here ). Still, for ETF investors who are bearish on oil for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance and a belief that the “trend is the friend” in this corner of the investing world. Original Post