The bulls returned to Netflix (NFLX) stock this week, bidding up shares 13% over the past two days. Netflix rose 5.2% on Tuesday to 117.10 in heavy trading. On Monday, Netflix soared 7.4%. On Monday, Pacific Crest Securities analyst Andy Hargreaves reiterated his overweight rating on Netflix stock, with a price target of 140. “Netflix is the best in the world at delivering on-demand TV, which should allow it to gain share of viewing hours and
Summary At the request of a reader, I modified my previous biotech portfolio to focus on healthcare. The result of applying the seasonal data of the healthcare industry was a portfolio that outperformed buy-and-hold strategies, both on VHT and SPY. This six-trades-per-year strategy produces improved performance and dividends with decreased risk. (click to enlarge) Another reader request for a modification of the seasonal biotech portfolio : In this case, Lisa wants to build a seasonal portfolio that can effectively invest in the Vanguard Health Care ETF (NYSEARCA: VHT ). I will help her develop such a strategy and back test it against a buy-and-hold strategy, as well as holding the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). Why VHT and not XLV? Though I thought about using the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ) instead of VHT, as it is immensely more popular than VHT as a tool to gain exposure to the health care industry, I decided that Lisa was right in her first choice of VHT. An important reason to use VHT in place of XLV is its dividend. In a seasonality based portfolio, we will be ditching the healthcare ETF at certain times to avoid the opportunity cost associated with the healthcare down season. However, both VHT and XLV pay out dividends. So, another downside arises: missing out on the dividend. VHT is the superior choice here because – as you will later see – we will always be holding VHT at the ex-dividend date, allowing us to gain all the dividends of VHT while not being forced to hold the ETF during underperforming seasons. VHT’s ex-dividend date for its annual dividend (XLV pays quarterly dividends; hence the problem) is usually in December, which is a good time for healthcare stocks. However, this year, the ex-dividend date was in late September. But this does not damage our strategy, as we will also be long on VHT in September. The Seasonality In my original strategy on the seasonal portfolio strategy for the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ), we were long on IBB during November to January, long on utility stocks via the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) from February to May, and stayed out of the market the rest of the year (sell in May), with the exception of holding gold during September, which is when gold tends to outperform. However, simply replacing IBB with VHT in this strategy is arbitrary. Hence, I looked into the seasonality of the health care sector. I found many academic studies on the subject in scholarly journals, most of which concluded the same thing: Health care does best in the fall and winter. A study performed by Equity Clock over the past 20 years produced the following image and the one you saw at the beginning of the article, which both generally sum up what the journals were telling us: stick with health care during fall and winter but drop it afterward. This leaves us with some clear modifications to our previous seasonal portfolio. The act of holding VHT from September to February changes our strategy in the following ways. We no longer need to hold gold, as VHT’s seasonality overlaps with gold. VHT’s seasonality slightly overlaps with XLE, reducing our exposure to XLE by one-third; we will still be in by the ex-dividend date. If we do not add anything to our strategy, we will only be holding two ETFs all year: VHT in the fall and winter; XLE in the spring. So what about the summer? Do we just stay out of the market? Jeroen Blokland, Seeking Alpha contributor, has already answered this question. The solution, according to Blokland, is to hold the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ). This gives us a complete strategy: At February’s close: Sell VHT and Buy XLE A few days before April’s close (check IEF’s ex-dividend date for May): Sell XLE and Buy IEF At August’s close: Sell IEF and Buy VHT The Dividends Ignoring the performance of this strategy and looking at dividends alone, we see we gain exposure to all the dividends we can. A different strategy – for example one in which we buy XLE after March or VHT after September – could result in a drastically lower amount of dividends payouts. It is mere coincidence – and luck – that the strategy that should perform best also gives us full dividend exposure. VHT: Receive one annual dividend payout in September (or possibly December). XLE: Receive one quarterly dividend payout in March. IEF: Receive five monthly dividend payouts (we’ll be on the cusp ends of both May and September’s dividend payouts). And that’s in addition to the performance we can expect from the seasonality of these industries. Let’s now see how this strategy measures up: Results and Conclusion for Investors First, a notation issue: SPY_HOLD: Holding the SPY year-round VHT_HOLD: Holding the VHT year-round SECTOR: The strategy as outlined above The results: As you can see, the SECTOR strategy gives us the best risk vs. reward ratio. The strategy would have allowed us to reduce the downdraw resulting from the 2008 market crash while maintaining a level of growth exceeding both the SPY and the VHT alone. This portfolio has the highest Sharpe ratio – 0.78 – with the lowest max drawdown – -31.37%. In 2014, had you applied the three different portfolios with $100,000, the dividend payouts would have been (without reinvesting dividends): SPY_HOLD: $1832.01 VHT_HOLD: $1130.56 SECTOR: $487.24 (from XLE), $862.12 (from IEF), $1200.71 (from VHT) = $2550.07 Notice that the dividends we receive just from the VHT part of our portfolio exceed that of a VHT buy-and-hold strategy. This is because we are buying VHT with more than $100,000, as XLE and IEF grow our $100,000 into more capital to be used for the VHT purchase. Thus, we come out with more shares of VHT, equaling more dividends, even though we bought VHT later than buy-and-hold investors, whom we can assume bought the stock at a lower price. Overall, this strategy has three main advantages over the buy-and-hold strategies we looked at. First, it has improved cumulative performance. Second, it has the lowest max drawdowns. Third, it has the highest dividend payout. What’s the downside? I can think of two. First is the tax issue, which varies across individuals. If you’re playing this in an IRA, you can come out okay. The second is the increased commissions, as you’ll be making six trades per year, as opposed to one. In the end, you must decide whether the time invested in a seasonal strategy is appropriate for the increased gains and dividends. If you’re interested in seeing some tweaks to this strategy, ask me in the comments section or via mail. I’ll be rolling out my premium Seeking Alpha backtesting newsletter soon, in which I backtest your strategies. For example, if you want to see the above SECTOR strategy tested with different ETFs as the forerunners, just leave your ideas below.
American Funds, proclaimed as one of the largest active fund managers, perhaps wants to forget its third quarter performance – the sooner the better. The handful of flimsy gainers compared to the horde of mutual funds that ended in the red painted a dismal picture of the quarter. None of the American Funds mutual funds could even reach a 2% gain in the third quarter, whereas 371 funds ended with at least a 5% loss. As for the broader markets, the key benchmarks suffered their worst loss in four years. In the third quarter, the Dow, the S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively. In fact, calling the third quarter a bloodbath will not be far from the truth. Just 17% of the mutual funds managed to finish in the green in the third quarter. This was a slump from 41% in the second quarter, which was also a sharp fall from 87% of the funds that ended in the positive territory in the first quarter. However to justify American Funds’ dismal performance in relation with the broader markets will only be partially right. American Funds even failed to beat the modest-to-poor performances from key peers like Franklin Templeton, Fidelity, Vanguard or T. Rowe Price mutual funds. American Funds in Q3: Comparative Study As mentioned, American Funds failed to beat its major peers. The best gain from this fund family was a meager 1.7% scored by the American Funds U.S. Government Securities Fund® Retirement (MUTF: RGVFX ) . This 1.7% gain was not only far short of the best gains achieved by key peers, but was also somewhere around the average gains that mutual funds from fund families like Franklin Templeton, Fidelity, Vanguard, BlackRock or T. Rowe Price scored. In a quarter ravaged by headwinds, mutual funds from the Vanguard Group gave a decent performance. Its best gain hit 8.4%, achieved by the Vanguard Extended Duration Treasury Index Fund Inst (MUTF: VEDTX ) . Separately, Fidelity’s top-gainer, the Fidelity Spartan® Long Term Trust Bond Index Fund (MUTF: FLBAX ) , could post only 5.5% return. In fact, the only other fund that managed a 5% plus gain from this lineup is Investor class fund, the Fidelity Spartan® Long Term Trust Bond Index Fund Inv (MUTF: FLBIX ) . For T. Rowe Price, the T. Rowe Price U.S. Treasury Long Term Fund No Load (MUTF: PRULX ) gained 5.1% and was the best performer. However, it was the only fund in the 180 T. Rowe Price assortment we studied, that posted a 5% plus return. Franklin Templeton could put up a modest show in the tough third quarter. The Franklin Real Estate Securities Fund Retirement (MUTF: FSERX ) was the best gainer among the Franklin Templeton mutual funds, which gained only 3.4%. BlackRock’s best performer was the BlackRock Real Estate Securities Fund Inst (MUTF: BIREX ) , which gained 2.4%. The average gain from mutual funds that finished in the green for Franklin Templeton, Fidelity, Vanguard and T. Rowe Price were 1.2%, 1.2%, 1.9% and 1.3%, respectively. Of the 629 American Funds mutual funds we studied, only 135 funds finished in the green with paltry gains. The average gain for these 135 funds was just over 1%. None of the funds could post above 2% return and 68 out of these 135 funds finished with sub 1% gain. Meanwhile, 493 American Funds mutual funds finished in the red. The average loss for these 493 funds was 6.6%. While 371 funds lost over 5%, 60 funds lost at least 10%. The biggest loser in the third quarter was the American Funds New World Fund® C (MUTF: CNWCX ) , which slumped 12.4%. In comparison, of the 626 funds we studied in the second quarter, 232 funds had finished in the green while 2 funds had break-even returns. The average gain for these 232 funds was 1.41%. This compared favorably to the average loss of -0.84% for the 392 funds in negative territory. (Note: The numbers include same funds of different classes) Top 15 American Funds Mutual Funds in Q3 Below we present the top 15 American Funds mutual fund performers of Q3 2015: Fund Name Objective Description Q3 Total Return Q3 % Rank vs Obj YTD Total Return % Yield Beta vs S&P 500 Load American Funds US Govt Sec R5 Government 1.72 5 2.43 1.39 -0.03 N American Funds High Inc Muni Bnd F2 Muni Natl 1.67 14 2.34 4.07 0.05 N American Funds Tax Exempt of CA A Muni CA 1.66 41 1.84 3.23 -0.01 Y American Funds US Govt Sec A Government 1.64 7 2.19 1.1 -0.03 Y American Funds High Inc Muni Bnd A Muni Natl 1.63 16 2.22 3.91 0.05 Y American Funds Mortgage A Govt-Mtg 1.56 3 2.08 1.04 -0.01 Y American Funds T/E Bd of America A Muni Natl 1.44 31 1.58 3.13 Y American Funds Tax Exempt of VA A Muni State 1.4 42 1.13 2.94 0.01 Y American Funds Tax Exempt Of NY A Muni NY 1.34 49 1.26 2.72 0.02 Y American Funds Tax Exempt of MD A Muni State 1.24 61 1.02 3.03 0.08 Y American Funds Tax-Exempt Prsrv A Muni Natl 0.99 67 0.98 2.29 Y American Funds Bnd Fd of Amer A Corp-Inv 0.96 9 0.85 1.85 -0.01 Y American Funds Bnd Fd of Amer 529A Corp-Inv 0.93 10 0.78 1.76 -0.01 Y American Funds Ltd Term T/E Bond A Muni Natl 0.91 70 0.95 2.3 -0.01 Y American Funds Intm Bd Fd Amer R5 Corp-Inv 0.9 12 1.79 1.45 -0.03 N Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. Q3 % Rank vs. Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst. Morningstar data showed many sub Municipal fund categories, such as Muni California Long, Muni Pennsylvania and Muni New York Long, featured in the top performers’ list for the third quarter. However, the gains were modest, with Muni California Long giving the best performance with a 1.7% gain in the quarter. Long Government funds category was the second-best gainer in the third quarter. According to Morningstar, Bear Market funds category gained 13.1% and Long Government was next in line with gains of 4.3%. So we see that among the American Funds’ best 15 gainers, the Government category is the top gainer. However, Municipal Bond funds dominate the top 15 gainers’ list. Among the Municipal funds, the American High-Income Municipal Bond Fund® (MUTF: AHMFX ) , the American Funds Tax-Exempt Fund California® A (MUTF: TAFTX ) and the American High-Income Municipal Bond Fund® A (MUTF: AMHIX ) sports a Zacks Mutual Fund Rank #1 (Strong Buy). Meanwhile, the American Funds Tax Exempt Bond Fund® A (MUTF: AFTEX ) holds a Zacks Mutual Fund Rank #2 (Buy). Municipal funds the American Funds Tax Exempt Virginia Fund A (MUTF: TFVAX ) and the American Funds Tax-Exempt Fund of New York® A (MUTF: NYAAX ) carry a Zacks Mutual Fund Rank #3 (Hold). However, while the American Funds Tax Exempt Maryland Fund A (MUTF: TMMDX ) and the American Funds Tax-Exempt Preservation Portfolio A (MUTF: TEPAX ) carries a Zacks Mutual Fund Rank #4 (Sell), The American Funds Limited Term Tax-Exempt Bond Fund® A (MUTF: LTEBX ) has a Zacks Mutual Fund Rank #5 (Strong Sell). Coming to the Government funds, top gainer the American Funds US Govt Sec R5 and fifth-placed the American Funds U.S. Government Securities Fund® A (MUTF: AMUSX ) carry a Zacks Mutual Fund Rank #2. However, Government-Mortgage fund the American Funds Mortgage Fund® A (MUTF: MFAAX ) holds a Sell rating. Original Post