Tag Archives: health

XLV: Getting Your Dose Of Pharmaceuticals And Biotechnology In A Single Source

Summary XLV is a Health Care ETF with the heaviest allocations going to Pharmaceuticals and Biotechnology. The returns figures look fairly volatile in a regression analysis which makes it substantially more difficult to diversify away the excess risk. The nice thing for shareholders is that they would be holding the very companies that are establishing the prices for the medicine they may consume. 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 I am assessing is the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ). 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 for Health Care Select Sect SPDR ETF is .15%, which isn’t too bad at all. I’d love to see the expense ratio go under .10%, but .15% is within reason and not too bad for giving investors exposure to the Health Care sector. Remember that the Biotechnology sector is also within the Health Care sector which makes it more volatile. Largest Holdings (click to enlarge) I don’t see anything to complain about here. The top holdings for the ETF almost perfectly mirror the index so investors should expect the portfolio to have very similar returns. Given the low expense ratio, a fairly passive indexing strategy is usually the result. I’m fine with that. Passive indexing is a solid strategy over the long term. Looking at the individual companies, I like seeing Johnson & Johnson (NYSE: JNJ ) at the top of the holdings. This is a strong dividend company that offers investors some stability. Their product lineup is diverse enough that they are largely protecting from minor shifts in the economy and positioned to benefit from an aging population requiring more medicine. Sector The largest weighting by sector is clearly the pharmaceuticals rather than biotechnology stocks. As a result of this sector diversification the fund is dramatically more stable than peers that are heavily invested in biotechnology companies. On the other hand, the returns for it have also been materially weaker. 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 XLV is substantially less risky than the XBI. Since XBI is almost exclusively biotechnology companies, I’m not surprised that XLV is so much safer. Of course, it is still a fairly risky investment in its own right. The ETF has a beta higher than 1.00 so it will naturally be increasing the risk level on most traditional portfolios. The correlation with the S&P 500 stands at .88 which is high enough that it may be a concern. The bigger issue, in my opinion, is that XLV has a weaker negative correlation with the kind of long term bond holdings that investors would use to reduce portfolio volatility. In this case, that is demonstrated by having a negative correlation with BLV of only -.23 compared to -.29 for the S&P 500. I would treat XLV as a fairly aggressive allocation. If investors intend to bring their portfolio volatility significantly below the S&P 500, it will be more difficult if the allocations to XLV are significant. Despite the volatility, I do like the exposure within the portfolio. A heavy exposure to the pharmaceutical companies makes sense when an investor expects to be practically forced to buy their products in the future. While the portfolio has more volatility under modern portfolio theory, it does allow investors to benefit as shareholders if prices (and profits) from the pharmaceutical and biotechnology sector increase. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Still Believe In Goldman’s $20 Oil? Go Short With These ETFs

Oil has become the most perplexing commodity this year with wild swings in recent weeks. The latest and worst culprit is the China meltdown with global repercussions that is weighing heavily on demand. Further, ever-increasing production and a large supply glut are tempering its appeal across the board. As the Fed kept the rates on hold at its latest meeting on Thursday, oil price tumbled about 5% the next day. This is because the Fed’s decision of no rates hike led to further worries over the health of the global economy and will likely put more pressure on the price of oil. Notably, both U.S. and Brent crude have plunged about 15% in the year-to-date time frame with some forecasting a bigger drop in the days ahead. In particular, Goldman predicts that crude price could slide to $20 per barrel if production cuts fail to clear supply glut and new investments in the oil shale industry are not reduced (read: ” Oil ETFs Slide Again: More Pain in Store? “). Behind the Lower Forecast The demand and supply dynamics for oil is becoming worse by the day. This is especially true, as the Organization of Petroleum Exporting Countries (OPEC) has pumped out maximum oil in more than three years to maintain market share. Iran is looking to boost its production once the Tehran sanctions are lifted and inventories continue being built up. Additionally, oil production in the U.S. is hovering around its record level and crude stockpiles remain about 100 million barrels above the five-year seasonal average. However, the International Energy Agency (IEA) believes that the recent oil slump would force both the U.S. and other non-OPEC producers like Russia and the North Sea to cut their production sharply next year. It expects non-OPEC supply to reduce by 0.5 million barrels per day, the biggest decline in more than two decades, to 57.7 million barrels per day next year. Meanwhile, shale oil production in the U.S. will drop by 385,000 barrels per day. On the demand side, the agency expects global oil demand to climb to a five-year high of 1.7 million barrels per day this year and moderate to an increase of 1.4 million barrels per day next year (read: ” Positive News Flow Sparks Off Rally in Oil ETFs “). Though reduced output from non-OPEC and higher demand could check the global supply glut, the oil market will still remain oversupplied. As a result, Goldman lowered its 2016 price target for Brent and crude (WTI) to $49.50 per barrel and $45 per barrel from $62 and $57, respectively. Further, it also warned of crude hitting as low as $20 per barrel. How to Play? Given the bearish fundamentals, the appeal for oil will remain dull in the months ahead. This might compel investors to make a short play on the commodity, especially if they believe in Goldman. For those investors, while futures contracts or short-stock approaches are possibilities, there are a host of risk inverse oil ETF options that prevent investors from losing more than their initial investment. Below, we highlight some of these ETFs and the key differences between them: The United States Short Oil ETF (NYSEARCA: DNO ) This is an unpopular and liquid ETF in the oil space with an AUM of $24.7 million and average daily volume of 32,000 shares. The fund seeks to match the inverse performance of the spot price of light sweet crude oil WTI. It charges 60 bps in fees per year from investors and has gained about 28.2% in the trailing 13-week period. PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) This is an ETN option and arguably the least risky choice in this space as it provides inverse exposure to the WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil futures contracts. The note is unpopular as depicted by an AUM of $28.5 million and average daily volume of nearly 35,000 shares a day. Expense ratio came in at 0.75%. The ETN gained 30.2% over the last 13-week period. ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $152.7 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 1.7 million shares in hand per day. The ETF returned about 56% over the last 13 weeks (read: ” Oil Tumbles to Six-Year Low: ETF Tale of Two Sides “). PowerShares DB Crude Oil Double Short ETN (NYSEARCA: DTO ) This is also an ETN option providing 2x inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude, which tracks the short performance of a basket of oil futures contracts. It has amassed $47.7 million in its asset base and trades in a moderate daily volume of roughly 103,000 shares. The product charges 75 bps in fees per year from investors and is up 28.3% in the same time frame. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) This product provides 3x or 300% exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. The ETN is a bit pricey as it charges 1.35% in annual fees while average daily volume is good at over 1.8 million shares. It has amassed $222.6 million in its asset base and delivered whopping returns of nearly 72.2% in the same period. Bottom Line As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures. Still, for those ETF investors who believe in Goldman and are bearish on oil, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is a friend” in this corner of the investing world. Original Post

September’s Strong Competitive Wealth-Builder ETF Investment

Summary From a population of some 350 actively-traded, substantial, and growing ETFs, this is a currently attractive addition to a portfolio whose principal objective is wealth accumulation by active investing. We daily evaluate future near-term price gain prospects for quality, market-seasoned ETFs, based on the expectations of market-makers [MMs], drawing on their insights from client order flows. The analysis of our subject ETF’s price prospects is reinforced by parallel MM forecasts for each of the fund’s ten largest holdings. Qualitative appraisals of the forecasts are derived from how well the MMs have foreseen subsequent price behaviors following prior forecasts similar to today’s. The size of prospective gains, the odds of winning transactions, worst-case price drawdowns, and marketability measures are all taken into account. Today’s most attractive ETF… … is the Direxion Daily Healthcare Bull 3X ETF (NYSEARCA: CURE ). The investment seeks daily investment results, before fees and expenses, of 300% of the performance of the Health Care Select Sector Index. The fund creates long positions by investing at least 80% of its assets in the securities that comprise the Health Care Select Sector Index and/or financial instruments that provide leveraged and unleveraged exposure to the index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds, etc. It is non-diversified. (Source: Yahoo Finance ) The fund currently holds assets of $351 million and has had a YTD price return of +3.95%. Its average daily trading volume of 520,259 produces a complete asset turnover calculation in 21 days at its current price of $31.71. Behavioral analysis of market-maker hedging actions while providing market liquidity for volume block trades in the ETF by interested major investment funds has produced the recent past (6-month) daily history of implied price range forecasts pictured in Figure 1. Figure 1 (used with permission) The vertical lines of Figure 1 are a visual history of forward-looking expectations of coming prices for the subject ETF. They are NOT a backward-in-time look at actual daily price ranges, but the heavy dot in each range is the ending market quote of the day the forecast was made. What is important in the picture is the balance of upside prospects in comparison to downside concerns. That ratio is expressed in the Range Index [RI], whose number tells what percentage of the whole range lies below the then current price. Today’s Range Index is used to evaluate how well prior forecasts of similar RIs for this ETF have previously worked out. The size of that historical sample is given near the right-hand end of the data line below the picture. The current RI’s size in relation to all available RIs of the past 5 years is indicated in the small blue thumbnail distribution at the bottom of Figure 1. The first items in the data line are current information: the current high and low of the forecast range, and the percent change from the market quote to the top of the range, as a sell target. The Range Index is of the current forecast. Other items of data are all derived from the history of prior forecasts. They stem from applying a T ime- E fficient R isk M anagement D iscipline to hypothetical holdings initiated by the MM forecasts. That discipline requires a next-day closing price cost position be held no longer than 63 market days (3 months), unless first encountered by a market close equal to or above the sell target. The net payoffs are the cumulative average simple percent gains of all such forecast positions, including losses. Days held are average market rather than calendar days held in the sample positions. Drawdown exposure indicates the typical worst-case price experience during those holding periods. Win odds tells what percentage proportion of the sample recovered from the drawdowns to produce a gain. The cred(ibility) ratio compares the sell target prospect with the historical net payoff experiences. Figure 2 provides a longer-time perspective by drawing a once-a week look from the Figure 1 source forecasts, back over two years. Figure 2 (used with permission) What does this ETF hold, causing such price expectations? Figure 3 is a table of securities held by the subject ETF, indicating the manner in which a 3X leverage on the healthcare index is accomplished. The ETF’s ratios of current market price to various accounting measures are also shown. Figure 3 (Source: Yahoo Finance) Since the value of the index being leverage-tracked is driven by the intermediate unleveraged ETF, the Health Care Select Sector SPDR ETF (NYSEARCA: XLV ), it is useful to know the concentration of its top ten largest holdings and their percentage of XLV’s total value: Figure 4 (click to enlarge) (Source: Yahoo Finance) XLV concentrates 53% of its assets in its top ten commitments. This provides a responsive measure of the action of market prices of stocks in this essential sector. The major holdings are all established, dominant participants in the healthcare industry. Figure 5 is a table of data lines similar to that contained in Figure 1 for each of the top ten holdings of XLV, plus, for convenience, the XLV and CURE data itself. Figure 5 (click to enlarge) (Source: Peter Way Associates, blockdesk.com) Column (5) contains the upside price change forecasts between current market prices (4) and the upper limit of prices (2) regarded by MMs as being worth paying for price change protection. The average of +7.2% of the top ten XLV holdings is well above the market-average proxy SPDR S&P 500 Trust ETF’s (NYSEARCA: SPY ) +5.3%. Diversification of XLV’s other 47% of holdings damps its overall upside (as MMs see it) to only +5.3%. But in the same stroke, the risk side of the equation in (6) for XLV is brought down to worst-case price drawdowns of -3.2%, below the defensive SPY norm of -3.6%. In an environment many consider imbued with high market risk, XLV may provide a very attractive balance. The ability of XLV holdings to recover from those worst-case drawdowns and achieve profits (8) was shown in 85% of experiences. The equity population only recovered less than two-thirds of the time, and while the SPY experiences were more consistent, the achieved gains were much smaller. SPY has had only +3.1% gains previously from like forecasts of +9.4%. CURE provides an exciting history of price gains derived from the XLV experiences at times (like now) dictated by the MMs expectations for it, as measured by its current Range Index of 18. Each of the rows of data in Figure 5 is a sample of prior forecasts at the same level of RI as today’s in column (7). XLV has a RI of 42, while CURE, because of its leverage, is at a much more extreme low RI level. Instead of having about one and a half times as much upside, it is seen to have nearly triple. The win odds (8) for CURE need to be taken as perhaps a function of their small proportion of the available forecasts (16). But in every prior case, they have been profitable. And the typical holding periods of about two weeks are remarkable. Their size of +12% gains are quite competitive with the 20 best alternatives in the whole population, even should it take seven weeks to achieve. Conclusion CURE provides attractive forecast price gains, supported by its equally appealing largest underlying holdings and 3X operating or structural leverage. Both the ETF and many of its major holdings offer very attractive prospects in near-term price behaviors, demonstrated by previous experiences following prior similar forecasts by market-makers. But it may be considered a defensive commitment in the face of widespread anticipation of further market weakness. The blue summary row of Figure 5 labeled 20 Best-Odds Forecast Price Ranges tells what the current top-ranked wealth-building opportunities are offering, as a comparative competitive norm. YTD in 2015, 2200 of these 20-a-day list members have reached closeouts in an average of 2-month holding periods, providing an annual rate of average price change gains +24% better than SPY. CURE seems to provide an even more superior opportunity. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.