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Biotech ETFs Slide As Stocks Report Mixed Q4 Results

Since the beginning of the year, the biotech sector has been experiencing some weakness due to industry specific headwinds like pricing concerns and global factors like weak emerging market currencies and a strong U.S. dollar. To deepen its woes, the sector has failed to gain investor confidence so far in the fourth quarter earnings season. Although several well-known biotech industry players like Amgen Inc. (NASDAQ: AMGN ), Biogen (NASDAQ: BIIB ) and Gilead (NASDAQ: GILD ) easily managed to beat estimates on both earnings and revenues, other companies including Alexion Pharmaceuticals (NASDAQ: ALXN ) and Celgene Corporation (NASDAQ: CELG ) reported disappointing or mixed results. Quite expectedly, investors will keep an eye on biotech earnings for the rest of this season to assess whether the sector can pull off another turnaround supported by strong pipelines, innovative treatments, growing demand for drugs, especially for rare-to-treat diseases, an aging population and increased health care spending (read: What Lies Ahead for Biotech ETFs in 2016? ). Biotech Earnings in Detail Gilead reported impressive fourth-quarter results as both earnings and revenues outdid the respective Zacks Consensus Estimate. The biotech giant’s fourth-quarter earnings (including stock-based compensation expenses) of $3.27 per share beat the Zacks Consensus Estimate of $2.91. Reported earnings were significantly higher than the year-ago figure of $2.38 per share. Quarterly revenues surged 16.3% to $8.5 billion driven by strong product sales. The revenue figure breezed past the Zacks Consensus Estimate of $8.1 billion. Meanwhile, the company provided 2016 product sales guidance. The company expects product sales in the range of $30-$31 billion. The stock has added 2.9% since reporting earnings (as of February 5, 2016). Another biotech behemoth, Amgen also beat both earnings and revenue estimates in the fourth quarter. The company’s fourth-quarter 2015 earnings of $2.61 per share surpassed the Zacks Consensus Estimate of $2.27 and improved from the year-ago earnings of $2.16. Also, total revenues grew 4% to $5.536 billion, which beat the Zacks Consensus Estimate of $5.532 billion. Foreign exchange translation negatively impacted fourth quarter sales by two percentage points. Based on an improved revenue outlook, the company upgraded its outlook for 2016 earnings to $10.60-$11.00 per share from $10.35-$10.75 per share. The company also pushed up its revenue guidance to $22.0-$22.5 billion from $21.7-$22.3 billion. The stock has lost 2.2% since releasing earnings (as of February 5, 2016). Biogen also beat on earnings and revenues. The company’s earnings per share of $4.50 were well above the Zacks Consensus Estimate of $4.07. Earnings grew about 10% year over year while revenues increased 7.5%. Revenues came in at $2.8 billion, beating the Zacks Consensus Estimate of $2.7 billion. This biotech firm also provided revenue and earnings guidance for 2016. The company expects to earn $18.30-$18.60 per share on revenues of $11.1-$11.3 billion. The stock gained 1.5% since it reported earnings (as of February 5, 2016). On the other hand, Celgene reported mixed results with earnings of $1.00 per share (including stock-based compensation expenses) falling short of the Zacks Consensus Estimate of $1.02 and revenues of $2.6 billion beating the Zacks Consensus Estimate slightly. However, both earnings and revenues rose year on year in the reported quarter. Net sales of the drug Revlimid, the backbone of Celgene, saw a year-over-year rise of 18%. The company has kept its 2016 outlook intact. The stock is down 4.3% (as of February 5, 2016). Alexion also came up with disappointing fourth-quarter results with both earnings and revenues missing estimates. Fourth-quarter 2015 earnings (including stock-based compensation expense) of 84 cents per share missed the Zacks Consensus Estimate of 88 cents. Earnings were also below the year-ago figure of $1.14 per share. Nevertheless, Alexion’s revenues climbed 16.9% year over year in the fourth quarter to $700.1 million. Revenues, however, missed the Zacks Consensus Estimate of $706 million. Alexion has provided its outlook for 2016. The company expects adjusted earnings per share in the range of $5.00 to $5.20 on revenues of $3.05-$3.1 billion. Foreign exchange translations are expected to negatively impact revenues by $120 million and earnings by 31 cents. Shares gained 3.6% post earnings (as of February 5, 2016). ETFs in Focus Thanks to mixed results, biotech ETFs with considerable exposure to the five stocks above were all in the red in the last 10 trading sessions (as of February 5, 2016). This has put the spotlight on biotech ETFs. Below we discuss four of these ETFs having a sizeable exposure to the above stocks (see all Healthcare ETFs here ). iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) This top player in the biotech ETF space tracks the NASDAQ Biotechnology Index, holding 190 securities in the basket. Celgene, Amgen, Gilead Sciences, Biogen and Alexion are placed among the top 10 holdings with a combined exposure of about 41% in the fund. The fund has an asset base of more than $7.5 billion and trades in an average volume of nearly 2.7 million shares a day. It has an expense ratio of 0.48% and lost 11% in the above mentioned timeframe. IBB currently has a Zacks ETF Rank #2 (Buy) with a High risk outlook. Market Vectors Biotech ETF (NYSEARCA: BBH ) This fund follows the Market Vectors US Listed Biotech 25 Index and holds 25 securities in its basket. Gilead Sciences (13.2%), Amgen (12.9%), Celgene (10.3%) and Biogen (6.5%) take the top four spots in the fund while Alexion (4.8%) takes the sixth place. The fund has amassed nearly $529.8 million in its asset base and trades in moderate volumes of roughly 151,000 shares a day. The product charges an annual fee of 35 bps per year and lost 10.6% in the said timeframe. It currently carries a Zacks ETF Rank #2 with a High risk outlook. PowerShares Dynamic Biotechnology & Genome Portfolio ETF (NYSEARCA: PBE ) The fund tracks the Dynamic Biotech & Genome Intellidex Index. The top 4 holdings include Amgen (6.42%), Biogen (6.4%), Alexion (5.49%) and Gilead (5.28%). Total assets of the fund are $275.5 million representing 30 holdings. The fund’s expense ratio is 0.57%. The trading volume is roughly 83,000 shares per day. The fund has lost 10.6% in the past 10 trading sessions. It currently carries a Zacks ETF Rank #3 (Hold) with a High risk outlook. First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA: FBT ) FBT tracks the NYSE Arca Biotechnology Index and holds 30 securities in the basket. The fund is well diversified with no stock holding more than 4.1% weight. Biogen, Amgen, Celgene and Gilead are placed among the top 10 holdings with a combined exposure of about 14.8% in the fund. Total assets of the fund are $1.8 billion. The fund’s expense ratio is 0.58. The trading volume is roughly 475,000 shares per day. It currently carries a Zacks ETF Rank #4 (Sell) with a High risk outlook. The fund has lost 14.4% in the last 10 trading sessions. Link to the original post on Zacks.com

Global X Adds Emerging Markets To Scientific Beta Suite

Global X Funds is planning to add to its suite of Scientific Beta ETFs with a new fund focusing on emerging markets. According to a January 20 filing with the Securities and Exchange Commission (“SEC”), the Global X Scientific Beta Emerging Markets ETF should begin trading sometime in early April 2016, if not before. Suite of Scientific Beta ETFs Like its other Scientific Beta ETFs, Global X’s Emerging Markets ETF will track a custom index: the Scientific Beta Emerging Multi-Beta Multi-Strategy Equal Risk Contribution Index. The index’s objective is to outperform traditional market capitalization-weighted indexes, with a “limited amount of relative risk.” The index’s components are large- and mid-cap stocks that are highly liquid and trade in and are incorporated or domiciled in an emerging-market country. Index components are selected by applying four factors that have been widely recognized by academic literature to outperform over the long run: Value, Size, Low-Volatility and Momentum. Under normal circumstances, the fund will invest at least 80% of its assets in securities from the index, along with American Depository Receipts (“ADRs”) and Global Depository Receipts (“GDRs”). Global X’s other Scientific Beta ETFs launched on May 12, 2015. They include: Global X Scientific Beta US ETF (NYSEARCA: SCIU ) Global X Scientific Beta Europe ETF (NYSEARCA: SCID ) Global X Scientific Beta Japan ETF (NYSEARCA: SCIJ ) Global X Scientific Beta Asia ex-Japan ETF (NYSEARCA: SCIX ) Above Average Performance For the six months ending January 31, 2016, all four ETFs posted losses – but all four ranked in the top half of their Morningstar categories, too. SCIU and SCID posted respective six-month losses of 7.87% and 9.42%, but ranked in the top 41% and 31%, respectively, of their peers. SCIJ posted the lightest losses at 2.61% and ranked in the top 17%. And SCIX, though it nearly posted the steepest six-month losses at -9.41%, ranked in the top 1% of its Morningstar category for the period under review. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

The ‘Why’ Behind Michael Kitces’ Strange Finding That High Valuations Point To Low Returns For Only A Time And Then To Higher Than Normal Returns

By Rob Bennett Last week’s column examined a recent article by Michael Kitces ( Should Equity Return Assumptions in Retirement Projections Be Reduced for Today’s High Shiller CAPE Valuation? ) that advanced the amazing (but entirely true) claim that: The ideal way to adjust return assumptions…[may be] to do projections with a ‘regime-based’ approach to return assumptions. This would entail projecting a period of much lower returns, followed by a subsequent period of higher returns.” Stock returns do not play out in the pattern of a random walk. Not at all. The same pattern has been repeating for the entire 145 years of return data available to us today. Valuations move steadily up for a long time, perhaps 20 years. Then valuations move steadily down for a long time, perhaps 15 years. When valuations are very high, as they are today, you should expect 10-year returns to be low. But 30-year returns will be better. After the passage of 15 years or so of poor returns, a new period of gradually increasing valuations kicks in, countering the effect of the 15 years of poor returns. By the end of 30 years, the overall return may not be so bad. This is strange stuff. It’s one thing to agree that valuations affect long-term returns. That wouldn’t be possible if the market were efficient, as was once believed to be the case. But most investors have come to accept that Shiller is right that valuations matter; prices matter in every other market that exists, so it is not hard to understand that they would matter in the stock market too. But it’s something else to say that prices go up, up, up for many years and then down, down, down for many years. What’s that about? I was shocked by this result when I discovered it through my work with John Walter Russell at the old Safe Withdrawal Rate Research Group discussion board. Investing experts who engage in technical analysis are often ridiculed by investing experts who instead believe that market prices are determined by economic factors as engaging in some sort of voodoo. Citing return patterns sounds about as scientific as predicting a person’s future by asking him what Zodiac sign he was born under. It sounds too “out there.” This was my first reaction when John’s research revealed the pattern that has been governing stock prices for the entire history of the U.S. market. But puzzles bother me. When there is some facet of a phenomenon that I do not understand well, I find my mind returning to it again and again, searching for a reasonable explanation. Until all puzzles are resolved, I worry that I do not understand the matter under consideration as well as I need to to possess confidence in my beliefs about it. So for several years I found myself often wondering why the reality that Michael Kitces points to in his recent article is indeed a reality. Why do stock valuation levels head upward for a long time (with temporary drops mixed in, to be sure) and then head downward for a long time (with temporary rises mixed in). What could explain such a pattern? I often comment in my column how Shiller described his 1981 finding that valuations affect long-term returns as “revolutionary.” I believe that it really is that. I believe that what Shiller showed is that our fundamental belief about what causes changes in market prices is in error. The common and long-held belief is that it is economic realities that cause stock prices to change. What Shiller showed is that that is not so. If it were economic realities causing stock price changes, future returns would not be predictable because future economic realities are of course not predictable. If future returns are highly predictable, as Shiller showed, it must be something else causing stock prices to change. It’s investor emotion that is the primary cause of stock price changes, not economic realities. That’s the Shiller breakthrough. That changes everything. The strange pattern described in the Kitces article makes sense once you accept that it is investor emotion that is the primary cause of stock price changes. The key reality of the stock market is that it is stock investors who set prices. By bidding up or bidding down prices, we can collectively see to it that our portfolios reflect our personal desires. The economic realities don’t really matter. If we all want to retire early (and who doesn’t?), there’s nothing stopping us from bidding stock prices up to two times fair value or even to three times fair value. Stock investors can as a group collectively grant themselves raises at any time they please. Is that not so? Now – There must be some limit on this power we possess to vote ourselves raises. If there were no limit, we would not stop at increasing stock prices until valuations were at three times fair value (as they were in early 2000). We would take them to four times fair value, then five times fair value, then ten times fair value. Why not? The full reality is that, while we all possess a Get Rich Quick urge that prompts us to push stock prices higher until they reach two times fair value or perhaps three times fair value, we all also possess common sense, which makes us fearful of additional price increases once valuations have risen to insanely high levels. After about 20 years of rising valuations, the collective investor psychology always flips and instead of pushing prices up, up, up, we begin pushing them down, down, down. After a complete cycle has been completed, the long-term return for the cycle is always something in the neighborhood of 6.5 percent real, the long-term average return justified by the U.S. economic realities for as far back as we have records. So the strange reality explained by Kitces in his article applies: high valuations assure low returns 10 years out but returns closer to average for time-periods of 30 years or more. High-return periods are always followed by low return periods and low return periods are always followed by high return periods. The strategic implications are far-reaching. We once thought that stock investing risk was constant; it’s not – it’s variable. We once thought that investors should stick with the same stock allocation at all times. That’s wrong; investors who want to maintain the same risk profile MUST change their stock allocations in response to big valuation shifts to do so. We once thought that stocks were an inherently risky asset class. That’s not so. Investors who invest more heavily in stocks when valuations are low than they do when valuations are high earn higher long-term returns while reducing risk dramatically. I believe that Michael’s article will be the subject of widespread discussion following the next price crash. This is exciting stuff. This is the future. Disclosure : None