Tag Archives: health

Are Commission-Free Sector ETFs Really The Better Choice?

Summary Fidelity offers nine S&P Sector ETFs commission-free to its clients. The SPDR Select Sector funds have a long history and are widely used in various sector-switching strategies. How do the relative performances of these two sets of funds compare if we consider them for the short intervals that are typically used in such strategies? As I described previously ( here ), I maintain a dual-momentum S&P sector-switching portfolio which I rebalance every 30 days. To avoid commissions, I use Fidelity’s S&P Sector ETFs. The alternative, and the basis for most published sector-switching strategies would be SPDR’s long-established series of S&P Sector Select ETFs. The SPDR funds have been in existence since 1998; Fidelity’s offerings are just over two years old. Using the two-years data on the Fidelity funds I compared their performance with the SPDR funds. In doing so, I looked at intervals of 1, 3, 6, 12 and 24 months plus YTD. The results were informative but didn’t really give a satisfactory answer to my question, which was: Is the savings on commissions worthwhile, or might the SPDR funds performance be strong enough to wipe out the commission-free advantage of the Fidelity funds? The reason that exercise was inadequate to answer the question was that I used a single, fixed end-point. What is needed is the full history for the full period. If the funds are traded every 30 days (the minimum to qualify for the free trades), the funds’ relative performances to date is not the most relevant metric. Rather, it’s their performance over rolling 30-day periods for the entire history. I should note here that the actual intervals between trades vary from 30 to as many as 33 calendar days depending on when non-trading weekends and holidays relative to the 30-day minimum holding period. For the purposes of the strategy there’s a $48 fixed-cost for commissions on trading three funds every 30-days if using the SPDR funds. That’s $8/trade for each for three round trips. Funds that have commission costs associated with them would, therefore have to beat the commission-free funds by that $48 a month to justify foregoing the commission free funds. The $48 is a fixed cost regardless of the size of the trades, so the margin of outperformance required will depend on the size of the total portfolio. I’ll use three examples as I proceed. A $10,000 portfolio would need to beat by 0.48 percentage points on average to break even. For a $50K portfolio it would only need to beat by 0.096 points; for $100K, it is a near-trivial 0.048 points. The list of funds I examined is: Fidelity MSCI Consumer Discretionary Index ETF (NYSEARCA: FDIS ) Fidelity MSCI Consumer Staples Index ETF (NYSEARCA: FSTA ) Fidelity MSCI Energy Index ETF (NYSEARCA: FENY ) Fidelity MSCI Financials Index ETF (NYSEARCA: FNCL ) Fidelity MSCI Health Care Index ETF (NYSEARCA: FHLC ) Fidelity MSCI Industrials Index ETF (NYSEARCA: FIDU ) Fidelity MSCI Materials Index ETF (NYSEARCA: FMAT ) Fidelity MSCI Information Technology Index ETF (NYSEARCA: FTEC ) Fidelity MSCI Utilities Index ETF (NYSEARCA: FUTY ) Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) Energy Select Sector SPDR ETF (NYSEARCA: XLE ) Financials Select Sector SPDR ETF (NYSEARCA: XLF ) Health Care Select Sector SPDR ETF (NYSEARCA: XLV ) Industrials Select Sector SPDR ETF (NYSEARCA: XLI ) Materials Select Sector SPDR ETF (NYSEARCA: XLB ) Technology Select Sector SPDR ETF (NYSEARCA: XLK ) Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) It’s important to note that these are not strictly comparable in two cases. The Fidelity information technology ETF does not include telecoms; the SPDR information ETF does. SPDR also has a separate financial services fund which has no counterpart in Fidelity’s lineup, so the financial funds take somewhat differing approaches to the sector. My approach to this was to download the full data sets from Yahoo.finance for the Fidelity funds and for the SPDR funds for the same dates (for any interested readers, I use Samir Khan’s Multiple Stock Quote Downloader for Excel to do this efficiently, and highly recommend it.). I computed rolling 30-day returns using adjusted close data to account for dividends. I then plotted the differences between each SPDR fund and its Fidelity counterpart. Results The charts of the difference between the Sector Select SPDR ETF and the Fidelity MSCI Sector Index ETF follow. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) For these charts, positions above the zero line represent outperformance by the SPDR fund and those below the zero line show outperformance by the Fidelity fund for each of the rolling 30-day period from 11 Dec 2013 through 9 Nov 2015(n=482). The +0.5ppts line is a relevant marker because it’s the break-even point for commission costs on the $10K portfolio. In the next chart we can see that with two exceptions — health care and the poorly matched technology funds — the SPDR funds consistently have greater numbers of higher performing 30-day intervals. (click to enlarge) On a level playing field the choice would seem to favor the SPDR ETFs. But what about the original question? Now that we know the SPDR funds outperform in seven of the nine cases, we need to know if they outperform by sufficient margins and with sufficient frequency to overcome their commission costs. In this table, I list the percent of 30-day rolling returns where the SPDR ETFs met the minimum difference excess return required for break-even for each of three portfolio sizes, $10K, $50K and $100K. For the $10,000 portfolio it’s not even close. The commission costs would have been covered by superior returns from the SPDRs only 15.6% of the time on average. For much larger portfolios, $50 or $100K, it’s a near-wash, but even there the SPDRs fall short of clearing the break-even bar, albeit by a trivial amount. Summary S&P sector funds fill a niche in the market for a diverse range of switching strategies. Many of these involve short-term hold times and thirty days is not an uncommon choice. For traders who seek to save the commission costs associated with those frequent trades, the Fidelity offerings may be the only game in town. (Merrill Edge does offer 30 to 100 free trades a month for stocks or ETFs but requires a minimum of $25,000 in a cash account at either Merrill or Bank of America. For some, this can be an ideal choice.) I wanted to know if the Fidelity alternatives performed as well as the SPDRs or if the commissions (which are, after all, modest) might be a small price for getting better performance. I felt it was useful to put the results here because I’m sure I’m not alone in looking to the Fidelity sector funds as the cheaper alternative to the SPDR Select Sector ETFs. Results are interesting. The SPDR funds do outperform the Fidelity funds in all but two cases. One of these, Technology, is not a fully parallel comparison, so we can discount it. The other, Health Care, is a clear win for Fidelity unless I’ve missed nuances in the way the funds are structured. However, the differences are small enough to not justify moving to the SPDR funds. And, even if they were enough to push the over the break-even point, for my purposes I would opt for the Fidelity Health Care and InfoTech funds anyway. Indeed, I may change my pool to include the SPDR funds in the Consumer Discretionary, Energy and Industrial sectors where they are providing stronger returns. Realize, too, that I’ve treated the returns as a binary condition; they either make a cut or don’t. I’ve not considered the extent of outperformance, which can, of course, make a bit difference. A strictly qualitative look seems to indicate that the results are close enough that the analysis may not be worth the effort it will take, but I will spend some time thinking about how to go about doing it. Brokers are competing for our investing dollars. One front on these competitive battles is offering commission-free ETFs. These can be a boon to many of us who regularly invest modest amounts. I am much more willing to attempt to implement momentum strategies having a range of commission-free options available. At this time I have active three such strategies, all based on 30-day intervals using Fidelity’s cost-free ETFs (and all in IRA accounts, so there are no tax-consequences from the frequent trading). I’ve been wondering for some time if the commission-free funds were truly competitive. Superficial looks led me to the conclusion that they may not be my first choice for a buy and hold position, but for frequent trading commission-free, they are more than adequate. I’m satisfied that this casually validated finding is borne out by this more detailed look in the case of the sector funds.

The Generation Portfolio: Rate Fears Consume The Market

Summary Since my last update of the Generation Portfolio, I have added two positions: American Capital Agency Corp. and The Hershey Company. The market had a seesaw week, during which rate hike fears reappeared, but the Generation Portfolio continues to show solid gains. The market’s conclusion that a Fed rate hike is now likely may be premature, and it remains wise to look at oversold sectors such as Energy and Health Care. Background This is a continuation of a series of articles in which I update the progress of a portfolio that I manage for others. You may read my last article in the series here . This is my way of providing a different view of the trading experience apart from close examination of individual securities, and in a sense is a trading diary. The Generation Portfolio has an income focus, with every position paying a dividend. It is not meant to represent a completely diversified portfolio, but only that part devoted to income plays, and is provided for educational purposes. In these articles, I update the progress of the portfolio and give some thoughts on its aims and overall market conditions that affect it. Sector Opportunities There has been some obvious sector rotation over the past year, as shown in the current (as of this writing) chart below of the performance of the 9 Sector SPDRs over the past 52 weeks. I am going to use two sectors, Energy and Healthcare, to show how I use this information. The sector breakdown is a pretty good way to determine what is in favor at the moment, and what is out of favor. However, if you have a long-term focus, it also gives a clue as to long-term possibilities. Everything depends upon time frames, and comparing them can show what may be a good value relative to the overall market. While the energy sector has done poorly over the past year, there are signs that it is in a bottoming process. Changing to the six-month sector chart shows that the energy sector also is down for that time frame, and by almost as much as the 52-week time frame. At this point in the process, the energy sector looks like a bad place to consider putting any funds. An object in motion tends to stay in motion, and when the market moves against a sector, that view can last for a long time. With a long-term view, however, the important thing is to look for changes in sentiment. Let’s look at the three-month chart. The three-month chart shown above tells a much different story than the previous charts. Not only is the energy sector up, it is the third-best performing sector out of the nine total. On the other hand, health care, which was the third-best performer over the past 52-week period, now is at the bottom of the list, with the largest loss. Turning to the one-month period shows the influence of the market’s strong October, which was the strongest month of gains for four years. The three-month data shows that Energy has continued its rebound. In fact, all of the gains from its rebound have been in this time period. Heath care also has rebounded, but not enough to overcome the losses of the past six months. There are many ways to read the fluctuations in the sector data. It is interpretation more than science. You can draw vastly different conclusions based upon your overall outlook. That, as they say, is why they make markets. My take is that energy is in the middle stages of a bottoming process. It still has a long way to climb back to its position of a year ago, and could fall back down to its lows. However, its steadiness over the past three months in addition to the past month suggests to me that downside risk at this point is minimal. Healthcare also appears to be in a resting phase. It is basically flat over the past six months despite its recent bounce. It is in my view in an earlier stage of the bottoming phase than energy. The healthcare sector is likely to grind along the bottom for a while. It could offer some good values during this process. Since the sector already has pulled back, you are not buying at the top, though any sector can fall further depending upon news. Over time, the sectors have offered positive returns, as shown by one more chart of the five-year period. To me, the five-year chart is the most important of all. I have a long time frame, and am not too concerned about the usual short-term fluctuations of the market. Regarding the energy sector, this chart suggests to me that energy overall is not the best long-term growth opportunity. However, even despite the losses of the past year, it is slightly positive. The long-term trend remains higher, and recent losses have done nothing but erase past excesses without actually sending the industry into decline. My conclusion is that the losses of the last year are a buying opportunity for energy stocks, though we already may have seen the bottom. As for healthcare, the five-year chart shows that it is in a massive secular uptrend. It is the biggest gainer of the past five years out of all nine sectors. Global demographic trends support the view that healthcare is not a short-term fluke in terms of growth opportunities, but a long-term opportunity. The media focuses on individual U.S. health care laws and particular demographic groups such as “Boomers,” who are retiring every day. However, as a global issue, the opportunities in health care are not dependent upon domestic political issues, but rather upon a secular upswing in the need for provider services around the world. Thus, pullbacks in the sector also are buying opportunities for the long term. In the financial media, all you hear about are the big social media stocks that have been outperforming, the so-called FANG stocks: Facebook (NASDAQ: FB ), Amazon.com Inc. (NASDAQ: AMZN ), Netflix Inc. (NASDAQ: NFLX ) and Alphabet Inc. (NASDAQ: GOOG ). They indeed have done well this year, and for several years, in fact. However, there also are interesting long-term opportunities in sectors that don’t get nearly as much press, such as health care. I could go through analyses of all the sectors like this, but these are the two that stand out right now. They are good examples of how I approach the sector issue, and new data always influences my views. Investing in the right sectors often turns out well in the end. The Week That Was If October was a great month, November is shaping up as a more mixed affair. Stocks were up on Monday and Tuesday, in a continuation of the market’s good times from last month. However, on Wednesday, Fed Chair Janet Yellen testified by a House Committee that the December Fed meeting is “live,” and that rates could rise. This sent the market lower. Friday’s jobs report showing unexpectedly large jobs gains of 271k solidified the market’s concerns. Transactions I have made two transactions since my last Generation Portfolio article: Added American Capital Agency Corp. (NASDAQ: AGNC ); Added The Hershey Company (NYSE: HSY ). Further details are below. Generation Portfolio To Date Below are the transactions and positions to date in the Generation Portfolio. Below are the transactions to date in the Generation Portfolio. The Generation Portfolio as of 17 October 2015 Stock Purchase Date Purchase Price Latest Price Change Since Purchase WFC 8/25/2015 $ 51.75 $ 55.87 7.92% DIS 8/25/2015 $ 98.75 $115.60 17.13% BMY 8/25/2015 $ 59.75 $ 65.11 9.48% MFA 8/25/2015 $ 7.05 $ 6.81 (3.36%) OHI 8/31/2015 $ 33.95 $ 32.36 (4.21%) CVX 9/02/2015 $ 77.90 $ 94.03 20.71% PG 9/03/2015 $ 69.95 $ 75.57 8.03% CYS 9/04/2015 $ 7.68 $ 7.53 (1.95%) KO 9/09/2015 $ 38.50 $ 41.96 8.99% MPW 9/10/2015 $ 10.89 $ 11.13 2.20% WMT 9/10/2015 $ 64.40 $ 58.88 (8.73%) VTR 9/10/2015 $ 52.80 $50.95 (3.75%) KMI 9/11/2015 $ 29.95 $ 26.14 (12.99%) WPC 9/14/2015 $ 56.75 $ 62.04 9.23% T 9/17/2015 $ 32.50 $33.16 1.98% VZ 9/17/2015 $ 44.95 $45.76 1.81% MMM 9/18/2015 $139.90 $158.73 13.84% JPM 9/22/2015 $ 60.89 $ 68.72 12.92% PX 9/23/2015 $101.30 $113.58 12.12% VER 9/25/2015 $ 7.87 $ 8.25 4.83% WMB 9/28/2015 $ 39.48 $ 37.98 (3.80%) MAIN 9/28/2015 $ 27.47 $ 29.87 8.74% PFE 9/28/2015 $ 32.69 $ 33.72 3.79% TGT 10/16/2015 $ 75.15 $ 76.69 2.75% ABR 10/20/2015 $ 6.38 $ 6.58 2.82% AGNC 10/30/2015 $17.84 $ 17.77 (0.34%) HSY 11/06/2015 $85.45 $ 86.16 0.83% Latest prices and percentages are those supplied by the broker, TD Ameritrade, as of the close on 6 November 2015. A large legacy position in Ford Motor Company (NYSE: F ) and some other small legacy positions are omitted. Kindly note that percentage changes include the impact of reinvested dividends since the beginning of November, so they will not always correlate with the price changes of the stocks. There currently are 27 positions in the portfolio. Of these, 8 are positive positions and nine are negative (I go strictly by the broker’s calculations of gain and loss as of the close, as they know best). According to a spreadsheet that I maintain, the Generation Portfolio overall currently is up between 4% and 5%, a slight drop since the last article. Some dividends are not accounted for in the percentage changes because I only switched to reinvesting dividends recently. Losses in a couple of the energy stocks and interest-sensitive plays were largely balanced by rebounds in bank, retail and entertainment positions. Dividends One of the aims of the Generation Portfolio is to generate dividends, hence the name. Several dividends came in this week and were reinvested. Dividends Received To Date Stock Date Received Reinvested VTR 9/30/2015 No KO 10/01/2015 No CYS 10/14/2015 No VER 10/15/2015 No MPW 10/15/2015 No WPC 10/15/2015 No MFA 11/02/2015 Yes JPM 11/03/2015 Yes T 11/03/2015 Yes VZ 11/03/2015 Yes BMY 11/03/2015 Yes The dividends are split about equally between qualified and non-qualified. Analysis of the Holdings This week confirmed one thing in my mind: that the Fed gets government data well before it releases it to us. One thing that I constantly have to remind myself of is that the market is always right. Trying to argue against price moves is like arguing about the weather: you may have an excellent case, but it is going to rain whenever it wants to anyway. The consensus in the media – and the market – is that the latest jobs numbers were blow-out figures that do not just suggest that the Fed will raise rates at its next meeting, but demand it. That is the consensus view, and it has a lot of merit to it. After all, the numbers did beat expectations. I recently have been in the camp that thought that the economy does not need a rate increase, and that the data does not justify it. Back in February, I took a long look at the situation and decided that my own thinking is that there probably will be some small rate hikes beginning at some point late in 2015, and probably only one tentative rate hike in 2015. So far, if the market consensus is proven to be true, I was spot on with that assessment. I don’t mind being proven right, especially considering that when I made that prediction, the market was pricing in three rate hikes over the next year. Traders see a roughly 70% chance of a rate hike at the December meeting. However, we could all still be wrong. There remains a roughly 30% undercurrent of thought that the Fed won’t raise. I’m not so sure that means anything, because the consensus about this has been wrong all year long (and in 2014, too). However, the traders with such a poor track record sometimes are right, and they are betting with real money, so their view must be respected. Since the media has concluded that the Fed will act, how can this be? (click to enlarge) The graph above of the jobs data over the past decade shows that there was indeed an uptick in the employment numbers last month. However, when you look at the overall trend, does it look as though much has changed? To me, it appears that the jobs numbers have been treading water since 2010. They have settled around an average gain of 200k per month. The variations have declined, so that there is a tighter fit to the trendline in recent months. Completely overlooked by most of the financial media was that the change for September was revised downward, from +142,000 to +137,000. Thus, the jobs gains in October were a bit less than the +271k figure would suggest. As the report also noted that, after all the revisions, “Over the past 3 months, job gains have averaged 187,000 per month.” This compares with another sentence from the report in a different location, “Over the prior 12 months, employment growth had averaged 230,000 per month.” I don’t know about you, but I do see a trend there – downward. Also noted in the report is that “Hourly earnings have risen by 2.5 percent over the year.” Many feel that this cinches the case for a rate hike, because it suggests that the inflation rate – the other arm of the Fed’s dual mandate – must follow suit. The Fed all along has said that it considers 2% inflation to be its threshold for raising rates. So far, that threshold has not been met. Also completely ignored by the media was that “The average workweek for all employees on private nonfarm payrolls remained at 34.5 hours in October.” That is not a sign of a tightening labor market. (click to enlarge) Strangely enough, though, even after this “hot” jobs report, the very same market consensus that is pricing in a December rate hike also continues to price in inflation expectations well below 2% (though they have ticked up slightly). That this is an internal contradiction does not seem to have occurred to many people. The bottom line is this: recall that the Fed has two mandates, not just one, and neither is really justifying a rate hike right now. All of these quibbles, aside, the media has decided that the market has decided that the Fed will raise rates in December, to wit: It’s interesting to note that before this week, everyone who was predicting a rate hike in December was saying that there needed to be two hot jobs reports before then to justify such a hike. Now, apparently, the market has concluded that only one seals the deal. And that is all well and good, but for one nagging detail: this latest jobs report was not “stellar,” it was barely above average for the past year. Apparently one good, not stellar, jobs report is all the market needs now to consider the economy to be on fire. Times have changed. The market has been manic on this issue for years now. It see saws between unblinking conviction that a rate hike must happen, and now, and complete certainty that the economy would not support one. The truth lies in between. A rate hike may be on the table, but then, it has been all year and nothing has happened. With earnings season now largely behind us, it’s time again for Fed frenzy. The Fed can and will do what it feels best. My analysis from February easily could be proven right in the end, and there will be one Fed move in 2015. Personally, I wish the Fed would raise rates and get it over with, the suspense and uncertainty has been far worse for capital allocation than past rate hikes have proven to be in actuality. Whether the Fed actually does raise rates, though, remains very much an open question. The best move in this uncertain environment is to stay diversified, hedge your bets and watch your sectors for opportunities. Conclusion The Generation Portfolio remains solidly in positive territory, and the dividends have begun rolling in. After a spectacular October for the market, prices retreated as the odds of a Fed rate hike grew. However, Fed action is not a certainty, and there is another jobs report left before the December Fed meeting. This remains a good time to maintain a diversified portfolio that takes into account all possibilities, and to watch for undervalued sectors which may pay big gains over the longer term.

Healthcare And Biotechnology Closed-End Funds

Summary Tekla offers four closed end funds in the biotechnology/healthcare sector. Two long-established funds are focused on capital growth. Two newer funds add current income to their investment objectives. Healthcare and Biotechnology seem to have caught their stride after a rough third quarter. There are a lot of ways to invest in these sectors. One of the least appreciated is closed-end funds, and the best of these, in my opinion, come from Tekla. Tekla sponsors four funds. Two are well established funds that are regularly found at or near the top of the pack for equity CEFs. Two are new, one a little more than a year old and the other a little more than a quarter. The stalwarts are Tekla Healthcare Investors (NYSE: HQH ) and Tekla Lifesciences Investors (NYSE: HQL ). The new-comers are Tekla Healthcare Opportunities (NYSE: THQ ) and Tekla World Healthcare (NYSE: THW ). Some descriptive details for these funds are in the table. The two older funds operate much the same. They are unleveraged and have managed distribution policies for their quarterly distributions. The younger funds are structured differently from the older funds, but are similar to each other. For one thing, they use leverage to achieve their investment goals. Precisely what the extent of that leverage may eventually be is unclear. THQ is reporting 9.6% leverage at present, and THW is too new to have reported. THQ and THW also have managed distribution policies, but theirs are structured differently from HQH and HQL. They pay distributions monthly. Investment Goals HQH invests in the healthcare industry (including biotechnology, medical devices, and pharmaceuticals). The fund’s objective is to provide long-term capital appreciation through investments in companies in the healthcare industry believed to have significant potential for above-average long-term growth. Selection emphasizes the smaller, emerging companies with a maximum of 40% of the Fund’s assets in restricted securities of both public and private companies. HQL primarily invests in the life sciences (including biotechnology, pharmaceutical, diagnostics, managed healthcare, medical equipment, hospitals, healthcare information technology and services, devices and supplies), agriculture and environmental management industries. The Fund’s objectives and selection criteria are the same as HQH except for a change in wording from healthcare to the life sciences industry. Note that biotechnology heads the lists for each. To a large extent these are primarily biotech funds. One particularly interesting point is that the funds can and do invest in private companies. This can open opportunities not generally available to most investors, and certainly not readily accessible by investing in open-end mutual funds or ETFs. The difference between HQH and HQL is that HQL’s mandate is expanded to include agricultural and environmental biotechnologies. THQ and THW invest primarily in the healthcare industry. The funds’ objectives are to seek current income and long-term capital appreciation through investment companies engaged in the healthcare industry, including equity securities, debt securities and pooled investment vehicles. Notice that HQH and HQL make no mention of current income in their goal statements and THQ and THW do. Notice also, that THQ and THW include debt securities in their investment strategies. THW differs from THQ in being targeted more as an international fund. It expects to invest at least 40% in companies organized or located outside the United States. Both expect to invest in debt securities and pooled investment vehicles in addition to equity. So there are marked differences between HQH and HQL on one hand, and THQ and THW on the other. HQH/HQL are more closely focused on biotech; THQ/THW invest more broadly in the healthcare sector. The first set does provide excellent income, but that is not its purpose, which affects how the fund is managed. Finally the new funds expand their investment programs to include debt securities such as convertible and non-convertible bonds and preferred shares. Distribution Policies All four have managed distribution policies, but the terms of the policies are different. HQH and HQL have as their distribution policy the intention to make quarterly distributions at a rate of 2% of the fund’s net assets. To the extent possible, they will to do so using net realized capital gains. If those gains fall short of the target this could result in return of capital to shareholders. Capital gains in excess of distributions will be returned to shareholders as a special distribution with the December distribution. The default for HQH’s and HQL’s distributions is that they are taken in stock. Investors do have the option to request cash distributions. This policy reflects the funds’ emphases on capital appreciation rather than current income, and is unusual for CEFs. Both HQH and HQL began making quarterly distributions in 2000 (previous to that they were made annually). Both suspended distributions for three quarters in 2009-10 making no payment between June 2009 and June 2010. Otherwise, the funds have met their 2% of NAV payout objective without return of capital for all but two of the 60 quarterly payments they have made. Distributions for Q1 and Q2 of 2009, the quarters prior to the suspension of distributions did include return of capital. THQ and THW have current income as an investment objective. Their managed distribution policies are more similar to that of other managed-distribution CEFs. Although I have not seen it explicitly stated in the materials I’ve viewed, I assume that it means the funds expect to maintain consistent monthly payments independent of fluctuations in NAV and income, which is the most typical pattern of managed distributions. This can mean distributions that include return of capital and periodic occurrences of negative undistributed net investment income. THQ has paid $0.1125/share monthly since inception. THW has paid $0.1167/share for its three distributions. Current Status The two older funds are currently priced at premiums near 5%. The new funds have double-digit discounts as seen in this table. The distribution percentages shown in the table are based on recent payouts. According the funds’ policies the next distribution for HQH and HQL will be 2% of NAV on the record date. Z-Scores give us an indication of where the discount/premium stands in relation to the past. Positive Z-Scores mean the discount has shrunk or the premium has grown over the period. The absolute value represents the number of standard deviations the current value is relative to the average for the period. Large Z-scores (say, over 2 or under -2) can often suggest mean reversion is imminent. These values tell us that for HQH and HQL the premiums stand well above their means for 3, 6 and 12 months. As recently as the end of September, HQH had a -8.85% discount and HQL’s was -6.2%. Both funds have seen volatile pricing relative to NAV recently and have seen their discount/premium fluctuate widely. This is seen in HQH’s chart (from cefconnect.com ). (click to enlarge) During the third quarter meltdown for healthcare and biotechnology there was near-panic selling of the fund causing the discount to fall below -8%. With signs of recovery in October, the premium has been restored. These are the sorts of movements that some CEF investors look for and hope to take advantage of when they do occur. Portfolios HQH and HQL have very similar portfolios. HQL nominally adds exposure to agricultural and environmental biotechnology to HQH’s pure play in healthcare but this not obvious without getting deep into the fund’s holdings. At the top it looks very much like HQH. HQH holds 96% in equity; for HQL it’s 92%. The remainder is primarily in debt instruments. THQ holds 18.5% of its portfolio in debt instruments. THW’s portfolio remains a black box at this time, as there have been no reports as yet by the fund. Top holdings are available for HQH, HQL and THL but not for THW. (click to enlarge) Note how similar HQH and HQL’s lists are. The clear emphasis here is on biotechnology. THQ has positions extending beyond biotechnology to include more traditional healthcare companies such as Johnson & Johnson and Pfizer which is consistent with its more explicit emphasis on income. Other Healthcare CEFs My focus here has been on the Tekla offerings with the intention of clarifying how the new funds differ from the established funds. Before closing, I would be remiss to not mention two other healthcare CEFs; BlackRock Health Sciences (NYSE: BME ) and Gabelli Health & Wellness (NYSE: GRX ). BRE is more similar to HQH and HQL in that it is unleveraged and entirely domestic, but its focus is less on biotechnology than those funds. GRX carries 20.5% effective leverage and has a more diverse portfolio that includes food companies such as Kraft Foods and Kikkomann Corp as well as heathcare holdings. It is 84% domestic and 15% Developed Europe and Japan. BME, like the older Tekla funds shows extensive movement in its premium/discount. It now stands at a 7% premium, up from its 52 week average but well below its 52 week high of 16.2%. GRX, by contrast, tends toward a persistent discount which is now -13.2%, near its 52 week low of -14.8%. BME recently has tended to perform comparably to the Tekla funds; GRX has consistently lagged. Over a longer time frame the Tekla funds have turned in much stronger performances than either BRE or GRX, likely a reflection of their emphasis on biotechnology over traditional healthcare companies. This is illustrated by this chart tracking total return for the past two and five years. (click to enlarge) Summary The two sets of Tekla funds, HQH and HQL on one hand, and THQ and THW on the other, have different objectives and approaches to healthcare and biotechnology investing strategies. HQH and HQL are primarily focused on generating capital appreciation. The younger funds are more in the traditional CEF mold of emphasizing current income as well as capital appreciation. Despite the lack of formal emphasis on income, the distribution policies of HQH and HQL are, in my view, primarily attractive to an investor interested in current income. Their distribution yields are attractive and growing with NAV growth. For a shareholder invested for capital appreciation, the distributions can raise tax issues, so the funds are probably best held in a tax-advantaged account in such cases. In a taxable account, it would seem to make more sense to use ETFs to provide exposure to biotechnology to satisfy a capital growth objective. ETFs can effectively provide that capital appreciation with much lower taxable distributions. The premiums for HQH and HQL argue against entry into these funds at this time. A patient investor would probably choose to wait for some reduction in the premiums, if not outright reversion to discount status. Those premiums are now approaching all-time highs for HQL and are at rarely seen levels for HQH. An income investor seeking exposure to healthcare with a biotech focus may find THQ more appealing than either HQH or HQL at this time. There is, of course, only a scant record for the fund. Tekla has shown itself to be a strong manager of biotech equity portfolios but has little record in expanding that to include debt and credit. The discount of -11.6%, about as deeply discounted as the fund has been in its short life, looks to provide an attractive entry. As for THW, the fund is too young and information too scanty to appeal to me at this time. I suspect it will evolve to be as similar to THQ as HQL is to HQH.