Tag Archives: health

Ill At Ease With Biotech? Prescribing #1 Healthcare ETFs

The recent carnage in biotech investing seems more vicious than anticipated. This hot corner of the broad U.S. healthcare market has seen many a correction before, but none seemed as rigorous as it looks now. The recent rout was instigated merely by a tweet – by presidential candidate Hillary Clinton. Her tweet raised concerns over the over pricing on life-saving drugs. Questions over biotech pricing came on the heels of a 5,455% price hike (in about two months) of a drug called Daraprim, used to treat malaria and toxoplasmosis. This gigantic leap in pricing action was taken by a privately held biotech company Turing Pharmaceuticals (read: How Hillary Clinton Crushed Biotech ETFs with One Tweet ). Pricing issues in the biotech space has long been a concern. On the whole, branded drug prices underwent a rise of about 14.8% last year, as per research firm Truveris. There are several other drugs namely cycloserine, Isuprel, Nitropress, and doxycycline that have seen enormous price hikes this year, per the source. This along with overvaluation concerns led to a bloodbath in this otherwise soaring sector last week. In fact, growing pains for biotech investing led the biggest related ETF iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) to incur the largest weekly loss in seven years. Plus, investors should note that biotech stocks underperformed the broader market during the last four election cycles, as noted by Barrons.com . Barrons’ analysis shows that the broader market indices including S&P 500, Dow Jones and NASDAQ composite gained 11%, 8%, and 18%, respectively, on average against 15% loss incurred by the NASDAQ Biotech index during last four election phases. In such a scenario, it is wise to take some rest off biotech stocks and ETFs, and instead spin your attention toward the more stable but equally promising broader healthcare ETFs (read: Guide to Inverse & Leveraged Biotech ETF Investing ). Why Broader Healthcare? The broader healthcare sector is also loaded with potential. A whirlwind of mergers and acquisitions, promising industry fundamentals, plenty of drug launches, growing demand in emerging markets, ever-increasing healthcare spending and Obama care play major roles in making it a lucrative bet for the long term. Moreover, unlike biotech, healthcare ETFs are relatively defensive in nature and do not completely let investors down even in a broader market sell-off. In the latest biotech tumult, when ETFs like the SPDR Biotech ETF (NYSEARCA: XBI ) , the ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ) and the BioShares Biotechnology Clinical Trials ETF (NASDAQ: BBC ) retreated in the range of 6% to 8% on September 25, most broader healthcare ETFs lost in the range of 2% to 3%. As a result, Zacks Rank #1 (Strong Buy) healthcare ETFs could be in watch ahead, at least until the penchant for biotech investing returns. Investors should note that the following healthcare ETFs hold a Zacks ETF Rank #1. PowerShares S&P SmallCap Health Care Portfolio ETF (NASDAQ: PSCH ) This ETF has delivered a spectacular performance in the broad healthcare world, returning nearly 25% so far this year and losing just 2.4% in the last one month overruling the biotech woes (as of September 25, 2015). The fund offers concentrated exposure to small cap healthcare securities. It holds 74 securities in its basket, with each security holding less than 4.61% share. From an industry perspective, about one-third of the portfolio is allotted toward healthcare equipment and supplies, followed by healthcare providers and services (28.3%) and pharmaceuticals (15.7%). The ETF has amassed $268.5 million in assets and trades in a lower volume of about 40,000 shares per day, while charging a relatively low fee of 29 bps a year. The fund continues to hold a Zacks ETF Rank #1 with a High risk outlook. SPDR S&P Health Care Equipment ETF (NYSEARCA: XHE ) This product looks to track the S&P Health Care Equipment Select Industry Index. Holding 73 stocks in its basket, each security accounts for less than 1.73% of total assets. This is often an overlooked fund with AUM of $51 million and average daily volume of about 5,000 shares. From an industry look, healthcare equipment accounts for over three-fourth of the portfolio while healthcare supplies have a considerable allocation. The product charges 35 bps in annual fees. XHE gained about 18.6% in the last one year and lost 4.2% in the last one month. It was also upgraded from Zacks Rank #3 (Hold) to Rank #1 in our latest Rank updates. iShares U.S. Medical Devices ETF (NYSEARCA: IHI ) This ETF follows the Dow Jones U.S. Select Medical Equipment Index with exposure to medical equipment companies. In total, the fund holds 52 securities in its basket with major allocations going to Medtronic Plc (NYSE: MDT ) and Abbott Laboratories (NYSE: ABT ) at 14.5% and 710.7%, respectively. The fund has been able to manage about $708 million in its asset base while volume is moderate at about 100,000 shares per day on average. It charges 45 bps in annual fees and expenses. This ETF was also upgraded from a Zacks ETF Rank #3 to Rank #1 recently. The product added 12.6% in the last one year and could be a nice pick for Q4. In the last one month, the fund lost 5.8% which was much lower than double-digit losses incurred by biotech ETFs. Link to the original article on Zacks.com

IYR: This REIT ETF Has Some Great Holdings

Summary The portfolio construction of IYR is easy to admire. They took the risk of making the second heaviest weighting an equity REIT with extreme levels of operational leverage. They even incorporate a very small weighting to mREITs which further diversifies the portfolio. A heavy allocation to REITs makes more sense for investors that are weak on bond positions. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds that I’m considering is the iShares U.S. Real Estate ETF (NYSEARCA: IYR ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio on IYR is .43%. Compared to other domestic equity funds like the Vanguard REIT Index ETF (NYSEARCA: VNQ ) or the Schwab U.S. REIT ETF (NYSEARCA: SCHH ), that is painfully high. VNQ charges .12% and SCHH charges .07%. Because I love diversification at low costs, I’m holding both VNQ and SCHH in my personal portfolio. Largest Holdings (click to enlarge) A large position to Simon Property Group (NYSE: SPG ) is a fairly normal starting point for most REIT ETFs. The very interesting thing about this portfolio is that they are using American Tower REIT Corp (NYSE: AMT ) as the second holding. For investors that are not familiar with AMT, they are a global telecommunications REIT. When you place a call from your cell phone, you may be using the services AMT provides as they contract with cellular companies to lease usage of their cell phone towers. The REIT has a very weak dividend yield and from most pricing metrics it looks absurdly expensive. The reason investors have kept shares of AMT so expensive is because their structure incorporates an enormous amount of operating leverage. When they go from having one client to two clients for a cell phone tower the variable costs are extremely low while the revenue scales up substantially. This is an interesting play because most holders of a REIT index would be looking to use the position to grab some dividends and AMT has fairly weak dividends. On the other hand, AMT is one of three major companies in their very small sector and there is the potential for excellent returns. This is a play with high risk and high potential returns. The best way to make those kinds of high risk plays is within the context of a diversified portfolio, so it makes sense that it would get a significant allocation within an ETF. Simply put, this strategy makes more sense from a diversification perspective than it does when we are considering why the investor might initially choose to buy a REIT ETF. Sector Exposure This breakdown of the sector exposure reinforces what I was seeing in the initial holdings chart. The heavy position in specialized REITs suggests a goal of using the ETF structure to create a portfolio that is substantially less volatile than the underlying holdings. Overall, I like the strategy in the portfolio construction. While I’d like to see more breakdowns on the “specialized” sector, I have to admit that I really admire seeing the ETF work to incorporate other types of holdings such as mREITs. That sector is highly complex and I spend a great deal of my time explaining it to investors. If investors get their exposure through a very small allocation within a REIT ETF, that would be a solid way to prevent the common investor mistakes of buying high and selling low which seems to be extremely common in the mREIT sector. Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include a the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion IYR has a great portfolio construction methodology for investors that want some diversified exposure to equity REITs. The dividend yield of 3.83% isn’t mind blowing, but it is higher than the yield on SCHH. Of course, investments in mREITs should help strengthen the dividend yield to make up for REITs like AMT that are priced based on expected future revenue growth combined with exceptional operational leverage. The only thing I really dislike in this ETF is that the expense ratio is just too high. I can’t justify paying that kind of expense ratio for a REIT ETF. If an investor is willing to put up with the huge expense ratio, they should take notice that the fund has a positive correlation with the long term bond portfolio in BLV. That can be difficult because investors would like to be able to use the negative correlations to hammer the portfolio volatility lower. On the other hand, the moderate correlation with the S&P 500 makes it a reasonable option for investors that intend to be running a portfolio that is very heavy on equities. I fall under that category. I run extremely heavy on equities and use a significantly higher allocation to equity REITs than I would if I were running a strong bond allocation.

Resilient Consumer? Not During The Manufacturing Retreat And Corporate Revenue Recession

Is the 70% consumer so resilient that he/she can overcome a global slowdown, a stagnant domestic manufacturing segment and a domestic revenue recession. Six of the regional Fed surveys – New York (Empire), Philadelphia, Kansas City, Dallas, Chicago and Philly – show economic contraction in manufacturing. The expected revenue for the S&P 500 for the third quarter is headed for a third straight quarterly decline at 3.3%; the 4th quarter should show a 1.4% decline to make it four in a row. Concerned investors started punishing foreign stocks and emerging market equities in May. The primary reason? Many feared the adverse effects of declining economic growth around the globe as well as the related declines in world trade. By June, risk-averse investors began selling U.S. high yield bonds as well as U.S. small cap assets. A significant shift away from lower quality debt issuers troubled yield seekers, particularly in the energy arena. Meanwhile, the overvaluation of smaller companies in the iShares Russell 2000 ETF (NYSEARCA: IWM ) prompted tactical asset allocators to lower their risk exposure. All four of the canaries (i.e., commodities, high yield bonds, small cap U.S. stocks, foreign equities) in the investment mines had stopped singing by the time the financial markets reached July and early August. I discussed the risk-off phenomenon in August 13th’s ” The Four Canaries Have Stopped Serenading.” What had largely gone unnoticed by market watchers, however? The declines were accelerating. And in some cases, such as commodities in the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ), investors were witnessing an across-the-board collapse. The cut vocal chords for the canaries notwithstanding, there have been scores of warning signs for the present downtrend in popular U.S benchmarks like the S&P 500 and Dow Jones Industrials. Key credit spreads were widening, such as those between intermediate-term treasury bonds and riskier corporate bonds in funds like the iShares Baa-Ba Rated Corporate Bond ETF (BATS: QLTB ) or the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ). Stock market internals were weakening considerably. In fact, the percentage of S&P 500 stocks in a technical uptrend had fallen below 50% and the NYSE Advance-Decline Line (A/D) had dropped below a 200-day moving average for the first time since the euro-zone’s July 2011 crisis. (See Remember July 2011? The Stock Market’s Advance-Decline Line (A/D) Remembers. ) Equally compelling, any reasonable consideration of fundamental valuation pointed to an eventual reversion to the mean; that is, when earnings or sales at corporations are rising, one might be willing to pay an extraordinary premium for growth. On the other hand, when revenue is drying up and profits per share fall flat – or when a global economy is stagnating or trending toward contraction – investors should anticipate prices to fall back toward historical norms. Indeed, this is why 10-year projections for total returns on benchmarks like the S&P 500 have been noticeably grim. Anticipating the August-September volatility – initial freefall, “dead feline bounce” and present retest of the correction lows – has been the easy part. When fundamental valuations are hitting extremes, technicals are deteriorating, sales are contracting and economic hardships are mounting, sensible risk managers reduce some of their vulnerability to loss. It is the reason for my compilation of warning indicators (prior to the downturn) in Market Top? 15 Warning Signs . Anticipating what the Federal Reserve will do next is a different story entirely. The remarkably low cost of capital as provided by central banks worldwide is what caused the investing community to dismiss ridiculous valuations and dismal market internals up until the recent correction. Now Fed chairwoman Yellen has explicitly acknowledged that the U.S. is not an island unto itself. The fact that half of the developed world in Europe, Asia, Canada, Australia are staring down recessions – the reality that many important emerging market nations are already there – has not slipped by members of the Federal Reserve Open Market Committee (FOMC). Unfortunately, the Fed’s problem with respect to raising or not raising borrowing costs does not end with economic weakness abroad. With 0.3% year-over-year inflation in July, the Fed’s 2% inflation target has been pushed off until 2018. With 0.2% year over year wage growth (or lack thereof), the Fed’s hope that consumer spending can save the day looks like wishful thinking. For that matter, as I demonstrated in 13 Economic Charts That Wall Street Doesn’t Want You To See , consumer spending has dropped on a year-over-year basis for 4 consecutive months as well as six of the last eight. Perhaps ironically, I continue to receive messages and notes from those who insist that the U.S. consumer is in fine shape. Even if he/she is stumbling around at the moment, he/she is consistently resilient, they’ve argued. I would counter that three-and-a-half decades of U.S. consumer resilience is directly related to lower and lower borrowing costs. Without the almighty 10-year yield moving lower and lower, families that have been hampered by declining median household income depend entirely on lower interest rates for their future well-being. Even with lower rates, perma-bulls and economic apologists will tell you that housing is in great shape. With homeownership rates now back to 1967? They’ll tell you that autos are in great shape. On the back of subprime auto loans with auto assemblies at a four-and-a-half year low? Wealthy people and foreign buyers have bought second properties, which have priced out first-time homebuyers. More renters than ever have seen their discretionary income slide alongside rocketing rents. And the only thing we’re going to hang our U.S. hat on is unqualified borrowers who cannot get into a house, but can get into a Jetta? (Yes, I intended the Volkswagen reference.) I am little stunned when I see people ignoring year-over-year declines in retail sales as well as the lowest consumer confidence readings in a year to proclaim that “everything is awesome.” If everything were great, the U.S. economy would not have required $3.75 trillion in QE or $7.5 trillion in deficit spending since the end of the recession. The Fed would not have needed 6-months to prepare investors for tapering of QE3 and another 10 months to end it; they would not have needed yet another year to get to the point where they’re still not comfortable with a token quarter point hike. The U.S. consumer requires ultra-low rates to get by, and that’s a sad reality with multi-faceted consequences. In my mind, it gets worse. Those who commonly fall back on the notion that 70% of the economy is driven by consumer activity seem to ignore the other 30% entirely. Manufacturing is falling apart. Year-over-year durable goods new orders? Down for seven consecutive months. Worse yet, six of the regional Fed surveys – New York (Empire), Philadelphia, Kansas City, Dallas, Chicago and Philly – show economic contraction in manufacturing. Does the 30% of our economy that represents the beleaguered manufacturing segment no longer matter? Is the 70% consumer so resilient that he/she can overcome a global slowdown, a stagnant domestic manufacturing segment and a domestic revenue recession? Investors who do not want to pay attention to the technical, fundamental or macro-economic warning signs may wish to pay attention the micro-economic, corporate sales erosion. As Peter Griffin of the Family Guy Sitcom might say, “Oh, did you not hear the word?” Simply stated, the expected revenue for the S&P 500 for the third quarter is headed for a third straight quarterly decline at 3.3%; the 4th quarter should show a 1.4% decline to make it four in a row. The Dow Industrials? They’ve experienced lower sales for even more consecutive quarters. Beware, perma-bulls would like to blame this all on the energy sector. Should we then ignore the ongoing declines in industrials, materials, utilities, info tech ex Apple? If we strip out energy, do we get to strip out the over-sized contribution of revenue gains by the health care sector? There’s an old saying that goes, “You can’t making chicken salad out of chicken caca.” Here’s the bottom line. Moderate growth/income investors who have been emulating my tactical asset allocation at Pacific Park Financial, Inc., understand why we will continue to maintain our lower risk profile of 50% equity (mostly large-cap domestic), 25% bond (mostly investment grade) and 25% cash/cash equivalents. We are leaving in place the lower-than-typical profile for moderates that we put in place during the June-July period. When market internals improve alongside fundamentals, we would look to return to the target allocation for moderate growth/income of 65%-70% stock (e.g., large, small, foreign, domestic) and 30% income (e.g., investment grade, high yield, short, long, etc.). For now, though, we are comfortable with lower risk equity holdings. Some of those holdings include the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ), the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) , the iShares Russell Mid-Cap Value ETF (NYSEARCA: IWS ) and the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ).