Tag Archives: health

Consider Adding Health Care To Your Winning Allocation: And The ETF To Do It

Summary Supplementing your core ETF portfolio with smart sector bets can lead to healthy returns. Powerful demographic and related trends make health care one such sector, and now may be a good time to get in. However, there are risks. A quality ETF can help to mitigate these. I share my suggestion as to the one you should choose. When building your ETF portfolio, it is good to start with the basics. In my previous work on Seeking Alpha, I have suggested a simple, yet powerful and globally-diversified portfolio based on just 3 ETFs . However, you may wish to enhance such a basic approach by supplementing it with ETFs targeted at certain sectors of the marketplace. REITs are one such possibility. In a follow-up article , I built a four-ETF variant of the base portfolio that includes REITS. For this article, however, let’s take a look at another sector in which you may want to make a targeted investment. I will also suggest that you use a specific ETF to do so. Why Health Care? Why Use an ETF? In my personal portfolio, I have chosen to add a targeted investment in the health care sector. Why? Please allow me to share just a couple of quick items I found when researching this topic. We have an aging population. Consider the following, from the Administration on Aging , part of the U.S. Department of Health and Human Services: The older population-persons 65 years or older-numbered 44.7 million in 2013 (the latest year for which data is available). They represented 14.1% of the U.S. population, about one in every seven Americans. By 2060, there will be about 98 million older persons, more than twice their number in 2013. People 65+ represented 14.1% of the population in the year 2013 but are expected to grow to be 21.7% of the population by 2040. Not surprisingly, with an aging population comes increased costs for health care. Consider two excerpts from a report on aging from the Centers For Disease Control : The increased number of persons aged > 65 years will potentially lead to increased health-care costs. The health-care cost per capita for persons aged > 65 years in the United States and other developed countries is three to five times greater than the cost for persons aged 65 years ($12,100), but other developed countries also spent substantial amounts per person aged > 65 years, ranging from approximately $3,600 in the United Kingdom to approximately $6,800 in Canada ( 13 ). However, the extent of spending increases will depend on other factors in addition to aging ( 12 ). The median age of the world’s population is increasing because of a decline in fertility and a 20-year increase in the average life span during the second half of the 20th century ( 1 ). These factors, combined with elevated fertility in many countries during the 2 decades after World War II (i.e., the “Baby Boom”), will result in increased numbers of persons aged > 65 years during 2010–2030 ( 2 ). Worldwide, the average life span is expected to extend another 10 years by 2050 ( 1 ). The growing number of older adults increases demands on the public health system and on medical and social services. Chronic diseases, which affect older adults disproportionately, contribute to disability, diminish quality of life, and increased health- and long-term-care costs. In summary, the reports reveal that, due to longer life spans, people often live longer with chronic disease. Sadly, factors such as obesity and diabetes, more and more common in our culture, also lead to greater need for medications and other health care support. Finally, technological advances are making possible the treatment of certain conditions that simply could not have been treated in the past Certainly, factors such as these bode well for the long-term outlook for health-care related products and services. At the same time, investment in the health care sector is not without its risks. For example, pharmaceutical companies must spend vast amounts on R&D to develop and bring new drugs to market. But getting a drug to market is no small task. To begin with, it is a real challenge to identify and develop new chemical compounds for such drugs. And even once a potential drug is developed, it must go through rigorous clinical trials before it is approved for sale to the public. Needless to say, not all drugs make it through this process. This is where the ability to use an ETF to invest in health care can be, well, good for your investment health. I will get into the specifics of our focus ETF as it relates to this matter in just a little bit. Why Now? I have been hoping to write an article on this topic for some time. Why did I choose to do so now? The impetus actually came from this news item right here on Seeking Alpha. I won’t bother recapping it; it is short and you can read it for yourself. But here is a picture that will make very evident what the quoted analyst was getting at. VHT data by YCharts The blue line represents the Vanguard Health Care ETF (NYSEARCA: VHT ), the focus of our article. The yellow line represents the broader S&P 500 index. As can be seen, there was a roughly 12% gap between the performance of this index and the S&P 500 just a little earlier this year. Due in large part to recent concerns having to do with the biotech sector, that YTD gap has narrowed to a mere 1.2%. As the quoted analyst suggests, this may offer a good opportunity to either enter, or add to your position in, this sector. The Power of VHT Earlier, I briefly touched on some of the risks involved in investing in the health care sector and suggested using an ETF to mitigate such risk. Simply put, this is because a well-chosen ETF will allow you to remain well diversified, thus lessening single-company risk. As alluded to earlier, in this article I chose to focus on the Vanguard Health Care ETF. This ETF is based on the MCSI US Investable Market Health Care 25/50 Index . Let’s start with a closer look at that index, in the below picture taken from the factsheet for the index. (click to enlarge) Here are a few things worthy of note: There are 349 constituents, or companies, in the index. The Top-10 holdings comprise some 44.96% of the overall index, and are mostly large-cap pharmaceutical companies. This is also reflected in the overall 36.58% weighting of pharmaceuticals in the index (see pie chart). However, this risk is somewhat balanced by the inclusion of McKesson Corp. (NYSE: MCK ) and similar companies involved in the distribution of health care products, and UnitedHealth Group (NYSE: UNH ) and similar companies involved in healthcare services. This diversifies your risk, as the pie chart shows, across various sub-industries within the overall health sector. If you look at the Portfolio and Management tab of the factsheet for VHT, you will notice that this ETF is extremely faithful in tracking this index. Vanguard supplements this with a rock-bottom expense ratio of .12%. The fund’s total net assets of $6.1 billion and average daily trading volume of $58.37 million mean that the fund is extremely liquid, leading to a low .07% trading spread (the average difference between “buy” and “sell” transactions). I would hope you hold this ETF for the long term, but the above figures will hold you in good stead should you need to trade. Finally, VHT carries a 1.45% distribution yield, which Vanguard recently shifted from being an annual distribution to a quarterly distribution, which I really love. Summary and Conclusion I believe health care is a great sector in which to make a targeted investment. In this article, I have recommended using an ETF to do so, and featured the Vanguard Health Care ETF as what I believe to be your best tool to do so. This excellent choice gives you tremendous diversity across the sector, coupled with a low expense ratio and great liquidity. Happy investing!

A Lower-Risk Way To Invest In The Dow

Summary During the average 6-month period over the last 10 years, the Dow-tracking ETF DIA gained 3.98%. DIA shareholders suffered a 38% decline during one of those 6-month periods. A hedged portfolio of Dow component stocks, such as the one shown below, can offer a higher expected return with less than half the drawdown risk. Although cost is a concern when hedging, in our example, the hedged portfolio has a negative cost. Risk Versus Return For The Dow-Tracking ETF Although not as widely-traded as ETFs tracking the S&P 500 and the Nasdaq, according to the ETF Database , the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is among the top-40 ETFs by average trading volume over the last 3 months, and has assets under management of over $11.5 billion, so it holds a place in the portfolios of a lot of investors. Any of those investors who owned DIA in late 2008 and early 2009 saw the ETF drop about 38% within a six-month period between August of 2008 and February of 2009. During the average six-month period over the last ten years, though, DIA investors had a respectable total return of about 3.98%. But as we’ll show below, by using the hedged portfolio method to invest in some of DIA’s top holdings, an investor can get a higher expected return over the next six months while risking a drawdown less than half as large as the one mentioned above. When Stocks Can Be Safer Than An ETF It may seem counterintuitive that you can be exposed to less risk by holding a handful of Dow components than by holding the ETF that owns all of them, but that can be the case when you own those stocks within a hedged portfolio. Although a diversified limits the idiosyncratic risk of owning individual stocks, it doesn’t limit market risk (DIA isn’t as diversified as some ETFs, as it has about half of its assets in its top-10 holdings). But a hedged portfolio limits both. Below, we’ll show how to construct a hedged portfolio out of DIA top holdings for an investor who is unwilling to risk a drawdown of more than 19%, and has $500,000 that he wants to invest. First, though, let’s address the issue of risk tolerance, and how it affects potential return. Risk Tolerance and Potential Return All else equal, with a hedged portfolio, the greater an investor’s risk tolerance — the greater the maximum drawdown he is willing to risk (his “threshold”, in our terminology) – the higher his potential return will be. So, we should expect that an investor who is willing to risk a 29% decline will have a chance at higher potential returns than one who is only willing to risk a 9% drawdown. In our example, we’ll be splitting the difference and using a 19% threshold (half of the 38% drawdown DIA investors experienced in 2008-2009). Constructing A Hedged Portfolio We’ll recap the hedged portfolio method here briefly, and then explain how you can implement it yourself using DIA’s top holdings as a starting point. Finally, we’ll present an example of a hedged portfolio that was constructed this way with an automated tool. The process, in broad strokes, is this: Find securities with relatively high potential returns. Find securities that are relatively inexpensive to hedge. Buy a handful of securities that score well on the first two criteria; in other words, buy a handful of securities with high potential returns net of their hedging costs (or, ones with high net potential returns). Hedge them. The potential benefits of this approach are two-fold: If you are successful at the first step (finding securities with high expected returns), and you hold a concentrated portfolio of them, your portfolio should generate decent returns over time. If you are hedged, and your return estimates are completely wrong, on occasion — or the market moves against you — your downside will be strictly limited. How to Implement This Approach Finding Promising Stocks If we were looking for securities with the highest potential returns, we wouldn’t limit ourselves to just Dow components; instead, we’d consider a much broader universe of stocks. But since we’re concerned with Dow stocks here, we’ll start with the top holdings of DIA. To quantify potential returns for DIA’s top holdings, you can check Seeking Alpha Pro for articles that offer price targets for the stocks, or you can use sell-side analysts’ consensus price targets for them and then convert those to percentage returns from current prices. For example, via Nasdaq , this is the 12 month consensus price target for Dow component and top-10 DIA holding Goldman Sachs (NYSE: GS ): You can use that consensus price target as a starting point for your estimate, adjusting it based on the time frame you’re using and whether you think it is overly optimistic or not. In general, though, you’ll need to use the same time frame for each of your potential return calculations to facilitate comparisons of potential returns, hedging costs, and net expected returns. Our method starts with calculations of six-month expected returns. Finding inexpensive ways to hedge these securities Our method attempts to find optimal static hedges using collars as well as protective puts going out approximately six months. Whatever hedging method you use, for this example, you’d want to make sure that each security is hedged against a greater-than-19% decline over the time frame covered by your potential return calculations. And you’ll need to calculate your cost of hedging as a percentage of position value. Select the securities with highest net potential returns When starting from a large universe of securities, you’d want to select the ones with the highest potential returns, net of hedging costs; you can do the same here, starting with the top holdings in DIA, but, in any case, you’ll at least want to exclude any of them that has a negative potential return net of hedging costs. It doesn’t make sense to pay X to hedge a stock if you estimate the stock will return

Happy 1-Year Birthday HDLV And Quarterly Rebalance: Altria Out, CME In

Summary HDLV has recently turned one year old and its performance since inception appears adequate, though data sources have been conflicting. The quarterly rebalance removed blue-chip favorites MO, VTR and ED, while introducing newcomers CME, PPL and WY. HDLV currently yields 9.7% on a 2x leveraged portfolio. HDLV: a one year review The ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (NYSEARCA: HDLV ), incepted on Sep. 30, 2014, has recently turned one year old. Since inception, it (12.43%) has slightly underperformed two other 2x dividend ETNs, the Monthly Pay 2xLeveraged Dow Jones Select Dividend ETN (NYSEARCA: DVYL ) (13.66%) and the Monthly Pay 2xLeveraged S&P Dividend ETN (NYSEARCA: SDYL ) (12.72%), while outperforming the Monthly Reset 2xLeveraged S&P 500 Total Return ETN (NYSEARCA: SPLX ) (7.48%). Note that all of the 2x funds mentioned above reset their leverage monthly, rather than daily. The total return performances of the aforementioned fund since the inception of HDLV in Sep. 2014 are shown below, with the unlevered SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) (4.96%) shown for comparison. HDLV Total Return Price data by YCharts In terms of volatility, HDLV appears to have done the worst out of all the 2x leveraged funds. This is disappointing because HDLV purports to hold stocks that show lower volatility than the broader market. Part of this could be due to HDLV’s heavy concentration in interest rate-sensitive sectors such as telecommunications and tobacco (refer to my HDLV update article ” 10%-Yielding HDLV May Be A Good Choice If Interest Rates Remain Low “), which moved together during the significant interest rate gyrations witnessed throughout this year. HDLV 30-Day Rolling Volatility data by YCharts Interestingly, InvestSpy gives different results on both total return and volatility. According to InvestSpy, HDLV has produced both the highest total return and lowest volatility out of the four 2x leveraged funds since inception (note that the high volatility of SPLX may be distorted by its lack of liquidity). Related to this, HDLV also shows the lowest beta and daily variation. Moreover, HDLV produced the lowest maximum drawdown out of the four 2x leveraged funds. Ticker Annualized Volatility Beta Daily VaR (99%) Max Drawdown Total Return HDLV 24.50% 1.19 3.60% -18.00% 17.10% SDYL 26.80% 1.39 3.90% -21.40% 14.10% DVYL 26.60% 1.5 3.90% -22.90% 14.70% SPLX 72.30% 1.46 10.60% -29.20% 10.20% I wanted to confirm the data using a third source of information, but unfortunately Morningstar does not give volatility data or Sharpe ratios on issues less than 3 years old. Therefore, depending on the source of data used, HDLV could either be ranked first or third out of the four 2x leveraged funds for total return, and either first or last in terms of volatility. This could be due to differences in the way that total return and volatility is calculated for the different data providers. HDLV has also recently just paid out its 12th dividend since inception, giving it a TTM yield of 9.7%. HDLV quarterly rebalance: Altria out, CME in As has been described in my previous article ” Higher Dividends With Less Risk (Part 2): A Second Look At ETRACS 2x US High Dividend Low Volatility ETN “, HDLV applies both dividend yield and volatility screens in selecting constituents. The selected constituents are then weighted according to average trading turnover, a factor that correlates closely with market capitalization. The result is a highly focused portfolio, with over 60% of the fund being concentrated in the Top 10 holdings. Given this high concentration of holdings, I believe that it is worthwhile to analyze individual additions and removals to the index when it is rebalanced each quarter in order to give some insight into the nature of the portfolio. The latest quarterly rebalance was performed last week, and allocates 60.21% of the index to the Top 10 holdings. The following table shows the Top 10 constituents of HDLV for the previous quarterly rebalance (Jul. 17, 2015) compared to the most recent rebalance (Oct. 16, 2015). Oct. 22, 2014 Jul. 17, 2015 Name Ticker Weighting / % Name Ticker Weighting Verizon Communications Inc. (NYSE: VZ ) 10.00 Verizon Communications Inc. VZ 10.00 AT&T Inc. (NYSE: T ) 10.00 AT&T Inc. T 10.00 Philip Morris International (NYSE: PM ) 8.87 Philip Morris International PM 9.60 Duke Energy Corp (NYSE: DUK ) 6.61 Altria Group Inc. MO 8.61 Southern Co (NYSE: SO ) 6.16 Duke Energy Corp DUK 6.82 Welltower (formerly Health Care REIT) (NYSE: HCN ) 4.11 Southern Co SO 5.87 CME Group Inc (NASDAQ: CME ) 4.11 Ventas Inc (NYSE: VTR ) 3.92 PPL Corp (NYSE: PPL ) 3.98 Health Care Reit Inc (now Welltower) HCN 3.72 HCP Inc (NYSE: HCP ) 3.51 Consolidated Edison Inc (NYSE: ED ) 3.44 Weyerhaeuser Co (NYSE: WY ) 2.86 HCP Inc 3.17 Top 10 total 60.21 65.15 What are the major changes in this rebalance? Key additions. CME, PPL and WY have entered the top 10, and were newly added to the fund this quarterly rebalancing review. Key removals. MO, VTR and ED were removed from the top 10, and from the fund altogether this quarterly rebalancing review. The removal of MO is particularly significant because this constituted 8.61% of the total weight of the fund. As an owner of HDLV, I was interested to find out why MO was removed while peer PM was not, why VTR was removed but peers HCN and HCP were not, and why ED was removed by peers DUK and SO were not. MO vs. PM Over the past 3 months, MO has significantly outpaced PM on a price basis. MO data by YCharts This has caused MO’s dividend yield to drop to around 3.5%. Thus, I believe that MO was excluded from the index because it was not among the top 80 names by dividend yield (amongst the top 200 largest US companies). MO Dividend Yield (TMM) data by YCharts VTR vs. HCN and HCP On a price only basis, VTR has performed comparably with HCN and HCP over the past 3 months. Its yield also sits between that of HCP and HCN. VTR Dividend Yield (TTM) data by YCharts Moreover, VTR’s volatility over the past 12 months has been similar to its peers – recall (from my previous article) that HDLV selects 40 of the lowest-volatility stocks out of the aforementioned 80. VTR 30-Day Rolling Volatility data by YCharts When considering market cap, VTR’s market cap is smaller than HCN’s, but larger than HCP’s, thus I do not think that this was the factor for exclusion. Therefore, I do not know why VTR was excluded from the newest edition of HDLV, while HCN and HCP were not. My suspicion is that Solactive, the index provider, did not account for VTR’s spin-off of Care Capital Properties (NYSE: CCP ) properly, leading to aberrant yield or volatility statistics that disqualified it for inclusion. If so, that is a disappointment because I feel that VTR deserves to be included in this fund, according to my analysis of the index guidelines. ED vs. DUK and SO ED has outperformed DUK and SO over the past 3 months. Similar to the situation with MO, ED could have been removed from its index due to its declining dividend yield. ED Dividend Yield (TMM) data by YCharts The new Top 10 additions, CME, PPL and WY have TTM yields of 4.3%, 4.3% and 4.1%, respectively, all higher than ED. Summary While the removal of blue-chip favorites such as MO and ED from the index can be disappointing to some, investors may be somewhat comforted by the fact that the fund is simply “selling high and buying low” as it removes companies whose price has appreciated to such an extent that their yield falls below the threshold, while replacing these with higher-yielding companies whose recent fortunes may not have been as auspicious. At the same time, the fact that only the top 200 U.S. companies by market cap are considered for selection may limit, but not entirely prevent, “falling knife” situations in which an incredibly high yield can be a predictor for an imminent dividend cut. While HDLV does not screen for dividend growers, it is noteworthy that all companies in their Top 10 have positive year-on-year dividend growth (PPL squeaks by with 0.3% 1-year DGR). Moreover, the decision to exclude MLPs from the index, in spite of the massive MLP bull market that occurred until collapse in late 2014, appears to be brilliant in hindsight. On the other hand, the removal of VTR appears, as far as I can tell, to be a mistake. In terms of portfolio concentration, I feel that this quarterly rebalance has improved the diversification of HDLV. The Top 10 holdings account for 60.21% of the portfolio, down from 65.15%. In the Top 10, there is now only 1 tobacco company instead of 2, and only 2 healthcare REITs instead of 3. This leaves room for the addition of CME, one of the largest options and futures exchanges, and WY, one of the world’s largest private owners of timberlands. Meanwhile, the addition of PPL to the Top 10 at the expense of ED would be considered a wash. In terms of performance since inception just over one year ago, HDLV has done either better or worse than two other 2x dividend ETNs, SDYL and DVYL, depending on whether YCharts or InvestSpy is used, while it has performed better than SPXL according to both data sources. Its volatility has either been the best or the worst among the four funds, depending again on which data is considered. Finally, HDLV’s TTM dividend yield is 9.7%, which is significantly higher than SDYL at 5.8% and DVYL at 7.6%.