Tag Archives: health

Biotech ETFs In A Bull Market: Positioning For A Q4 Rally

Summary Biotech ETFs have rallied off a triple bottom. The XBI is still the leader up 22.64% YTD with a high turnover small cap portfolio. Position new buys with two complementary ETFs. Biotech ETF Trends: What to watch for in a 2015 bull market The biotech 15%+ correction and increased volatility has unnerved many investors and traders. Risk remains high due to macroeconomic concerns and recent weakness in the healthcare sector. Momentum is gone and many high-flying emerging stocks have been crushed. But the bull market is intact and since late last Friday buyers were coming into the favored stocks. The biotech sector is still the market leader. Large cap biopharmaceutical stocks have been hit and many are in the red and should recover, but they are too earnings dependent to make huge moves in Q4 so we favor mid and small caps for trading and new positions. Mid-caps are favored because many have strong pipelines with potential for clinical breakthroughs and M&A action. Stock picking will get harder so for re-balancing portfolios and new positions consider ETFs. It is very difficult to track or analyze ETF holdings except to note style i.e. large cap, small cap, diagnostics, services etc. If you believe we have bottomed in biotech for the year and that we are poised for the year-end rally, this could be a good time to accumulate positions. The action this week has been favorable but the technicals must hold in a sell-off. Healthcare has the best of both worlds in this market: growth from biotech/devices and stability from services and tools. Here is where we stand on major biotech ETFs: The First Trust NYSE Arca Biotechnology Index ETF ( FBT) 115.38 up 13.1% YTD, the iShares Nasdaq Biotechnology ETF ( IBB) 350.72 up 15.62% YTD, the SPDR Biotech ETF ( XBI) 228.67 up 22.64% YTD. Here is a summary of ETF trends to watch: The biotech sector is more dependent on healthcare economics so the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ) needs to hold or move in tandem with biotech. XLV holdings include both biotech and large cap drugs: Johnson & Johnson ( JNJ), Pfizer Inc. ( PFE), Gilead Sciences, Inc. ( GILD), Merck & Co Inc. ( MRK), Amgen Inc. ( AMGN) etc. The small cap “equal weighted” XBI continues to be the leader although it can be more volatile particularly in down markets. The holdings include more speculative stocks that are turned over rapidly probably with a lot of help from algorithms: Anacor Pharmaceuticals, Inc. ( ANAC), Exelixis, Inc. ( EXEL), KYTHERA Biopharmaceuticals ( KYTH), Dynavax Technologies Corporation ( DVAX), Sarepta Therapeutics, Inc. ( SRPT) etc. IBB favors well known large caps among the top ten positions. Holdings include all the usual suspects adding up to 59% of total: Celgene Corporation ( CELG), AMGN, GILD, Regeneron Pharmaceuticals, Inc. ( REGN), Biogen Inc. ( BIIB) etc. It tracks the five-star Fidelity Biotechnology Portfolio Fund (MUTF: FBIOX ). FBT has shifted its strategy over the past year and has become broadly diversified with holdings in tools and services. Well known stocks include : Incyte Corporation ( INCY), Vertex Pharmaceuticals Incorporated ( VRTX), REGN, AMGN and diagnostic plays Myriad Genetics, Inc. ( MYGN), Qiagen N.V. ( QGEN). The technicals had rolled over into a downward channel but have recovered this week above the triple bottom for 2015 and at the SMA 200. Review the Rayno Biopharmaceutical Portfolio for new ideas and a comparison to the ETFs. For new investors and rebalancing healthcare portfolios we would favor complementary positions such as a fund FBIOX or IBB for core with XBI as a complement. Review our previous articles on Life Science ETFs which provides information on additional healthcare funds and ETF performance. Disclosure: I am/we are long GILD, FBIOX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: We use XBI long and short for trading and rebalancing portfolios. Share this article with a colleague

Oil Refiner ETF CRAK: A Better Buy Amid Weak Energy

Thanks to an ever-increasing production, a large supply glut and sluggish demand, oil price skidded to half over the past one year, making the commodity the worst nightmare. In fact, trading in oil became wilder last month after China devalued its currency and weaker economic data raised worries over the health of the world’s second largest economy, suggesting lower demand for crude. Currently, U.S. crude is hovering around $45 per barrel while Brent crude is trading above $48 per barrel. Market participants are bearish on oil prices for at least the short term as global developments are expected to add to the supply glut. This is because the U.S. is still producing oil at near record levels, the Organization of Petroleum Exporting Countries (OPEC) is pumping out maximum oil in more than three years, Iran is looking to boost its production once the Tehran sanctions are lifted and inventories continue being built up. On the other hand, demand seems muted at present given the persistent slowdown in China as well as sluggishness in Europe, Japan and other key emerging markets. The International Energy Agency (IEA) in its recent monthly report stated that the global oil market would remain oversupplied throughout 2016 though lower oil prices and a strengthening economy will boost oil demand at the fastest pace in five years. Oil Refining Thriving Amid Oil Prices Given the unfavorable fundamentals and a bleak oil outlook, almost every corner of the energy segment is suffering except oil refining, which is negatively correlated with the price of oil. This is because the players in this industry use oil as an input for processing refined petroleum products like gasoline. Hence, lower oil prices are boosting margins for refiners, leading to healthy stock prices. This trend is likely to continue if crude prices (input costs) remains lower or continue to fall further, leading to higher spreads. Spread is the difference in price between a barrel of oil and a barrel of refined product like gasoline, diesel, or jet fuel. As a result, the higher the spread, the more the profits will be for the oil refiners. That being said, as long as the spread remains stable at the current levels, refiners are expected to outperform the rest of the energy sector. Further, continued outperformance in the oil refining and marketing industry is well justified by its solid Industry Rank in the top 15% . Investors could tap the rising opportunity in this niche segment with the new Market Vectors Oil Refiners ETF (Pending: CRAK ) recently launched by Market Vectors. It is a one-stop shop for investors to play the oil refining market. CRAK in Focus CRAK looks to follow the Market Vectors Global Oil Refiners Index. The benchmark measures the performance of the largest and most liquid companies in the global oil refining segment. Companies eligible for inclusion in the index should generate at least 50% of their revenues from crude oil refining including gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals, or have at least half of their assets devoted to the refining of crude oil. The product is getting the first-mover advantage as it has accumulated $1.8 million in its asset base within three weeks of its inception. It currently trades in a lower volume of about 14,000 shares a day on average. Any Downside Risk? The fund is heavily concentrated on the top 10 firms with huge allocations to Phillips 66 (NYSE: PSX ) , Marathon Petroleum (NYSE: MPC ) and Valero Energy (NYSE: VLO ) that collectively make up for one-fourth of the portfolio. This increases company-specific risk and suggests that the top firms dominate the fund’s returns. While VLO was recently upgraded to a Zacks Rank #2 (Buy), PSX and MPC were downgraded to a Zacks Rank #3 (Hold) each. Further, the fund is not a pure American play and is hence exposed to currency risk. More than half the portfolio offers international exposure, namely Japan, India, South Korea, Poland, Taiwan, Portugal, Finland, Turkey, Australia, Thailand and Greece. Investors should note that it is a relatively high cost choice in the energy space. It charges a bit higher fee of 59 bps compared with the expense ratio of 0.15% for the broad sector fund – Energy Select Sector SPDR (NYSEARCA: XLE ) . Bottom Line Given the encouraging outlook for the oil refiners, CRAK could prove to be the lone star in the energy space in a plunging oil price environment. Original Post

XLP Has Numbers For Volatility And Correlation, But It Could Be Better

Summary The portfolio used by XLP isn’t optimized for the best possible performance. I love that the portfolio isn’t afraid to hold producers of addictive substances, but where is the BUD? The expense ratio is fairly solid at .15% and the yield isn’t too bad for an ETF used as a small allocation to overweight the sector. I’d like to see XLP increase the number of holdings within the ETF to reduce the concentrated risk of individual holdings. The low beta reflects a combination of mediocre correlation and low volatility which makes the fund a reasonable fit for a small allocation. 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. I’m working on building a new portfolio, and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ). 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 XLP is .15%. I’d like to see a little lower on domestic equity but for a sector-specific ETF, this is still within reason. Yield The ETF is yielding 2.58%. That isn’t enough for a large position in a dividend growth investor’s portfolio, but it is not low enough to really damage the dividend performance of an investor’s portfolio if it is simply being used to create a slight overweight on the sector due to the lower volatility of this sector. Allocations by Industry The following chart breaks down the allocations by each sector: The heaviest exposures are to food and retailing of staples with beverages also coming in as a “very heavy weight”. All around, it should be clear that the goal of this portfolio is to focus on companies that sell products that will maintain strong demand even if the economy is not performing very well. Accordingly, these companies as a group are less volatile than the broader market. Top Holdings The following chart breaks down the top 10 holdings in the fund: After seeing the beverage sector coming at over 18% of the portfolio, I was expecting PepsiCo (NYSE: PEP ) to have a slightly higher weighting. There are a few other things that surprised me as well though. For instance, CVS Health Corporation (NYSE: CVS ) has a higher weighting than Wal-Mart (NYSE: WMT ). I would have expected Wal-Mart to get a slightly higher allocation. I also would have expected Target (NYSE: TGT ) to get at least a small exposure in the portfolio, but when I downloaded the entire list of holdings it was not present. For tobacco being just over 15% of the portfolio, how about some alcohol exposure? I would have expected Anheuser-Busch (NYSE: BUD ) to merit a place somewhere in the list since the goal is to have companies that can continue to make sales even if the market turns down. Perhaps I’m being cynical to think I’d like to own a large company that sells low-cost alcohol as part of a strategy for hedging against a weak economy which can often include high levels of unemployment. It may be cynical, but it is also prudent financial planning. Despite my rationale for including BUD, it is not listed in the portfolio either. The portfolio has a total of only 38 holdings which is also lower than I would expect for an ETF whose primary purpose is to lower the volatility of the portfolio. Building the Portfolio This hypothetical portfolio has a moderately aggressive allocation for the middle-aged investor. Only 30% of the total portfolio value is placed in bonds and a third of that bond allocation is given to high-yield bonds. This portfolio is probably taking on more risk than would be appropriate for many retiring investors since the volatility on equity can be so high. However, the diversification within the portfolio is fairly solid. Long-term treasuries work nicely with major market indexes, and I’ve designed this hypothetical portfolio without putting in the allocation I normally would for REITs on the assumption that the hypothetical portfolio is not going to be tax exempt. Hopefully, investors will be keeping at least a material portion of their investment portfolio in tax-advantaged accounts. 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. (click to enlarge) A quick rundown of the portfolio The two bond funds in the portfolio are PIMCO 0-5 Year High Yield Corporate Bond Index ETF (NYSEARCA: HYS ) for high yield shorter-term debt and iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) for longer-term treasury debt. TLT should be useful for the highly negative correlation it provides relative to the equity positions. HYS on the other hand is attempting to produce more current income with less duration risk by taking on some credit risk. XLP is used to make the portfolio overweight on consumer staples with a goal of providing more stability to the equity portion of the portfolio. iShares U.S. Utilities ETF (NYSEARCA: IDU ) is used to create a significant utility allocation for the portfolio to give it a higher dividend yield and help it produce more income. I find the utility sector often has some desirable risk characteristics that make it worth at least considering for an overweight representation in a portfolio. iShares MSCI EAFE Small-Cap ETF (NYSEARCA: SCZ ) is used to provide some international diversification to the portfolio by giving it holdings in the foreign small-cap space. The core of the portfolio comes from simple exposure to the S&P 500 via SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), though I would suggest that investors creating a new portfolio and not tied into an ETF for that large domestic position should consider the alternative by Vanguard – Vanguard S&P 500 ETF (NYSEARCA: VOO ) – which offers similar holdings and a lower expense ratio. I have yet to see any good argument for not using or another very similar fund as the core of a portfolio. In this piece I’m using SPY, because some investors with a very long history of selling SPY may not want to trigger the capital gains tax on selling the position and thus choose to continue holding SPY rather than the alternatives with lower expense ratios. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. Despite TLT being fairly volatile and tying SPY for the second-highest volatility in the portfolio, it actually produces a negative risk contribution because it has a negative correlation with most of the portfolio. It is important to recognize that the “risk” on an investment needs to be considered in the context of the entire portfolio. To make it easier to analyze how risky each holding would be in the context of the portfolio, I have most of these holdings weighted at a simple 10%. Because of TLT’s heavy negative correlation, it receives a weighting of 20% and as the core of the portfolio SPY was weighted as 50%. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the S&P 500. 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. Conclusion The nice thing about XLP is that has a correlation of only .84 with the S&P 500 and .47 with high yield bonds. For an aggressive portfolio, a small allocation to XLP can provide a nice reduction in risk. The beta on the fund is only .65 which reflects the combination of moderate correlation to the market and lower total volatility as demonstrated by 12% annualized volatility when SPY had 15.5% annualized volatility. When it comes to the expense ratio and the statistical factors, I think XLP is doing a fairly good job. However, I can’t get past thinking that a portfolio that adds some exposure to other addictive substances like alcohol would be creating a more resilient base for the portfolio. At the same time, I’d like to see a slightly larger volume of holdings (perhaps around 70 rather than 38) to reduce the idiosyncratic risk from holding larger positions in individual companies. XLP is a decent ETF and it performs well in a portfolio. However, I think it could be optimized a little better. 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.