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Best And Worst Q4’15: Health Care ETFs, Mutual Funds And Key Holdings

Summary The Health Care sector ranks ninth in Q4’15. Based on an aggregation of ratings of 23 ETFs and 61 mutual funds. IXJ is our top-rated Health Care sector ETF and FSHCX is our top-rated Health Care sector mutual fund. The Health Care sector ranks ninth out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Health Care sector ranked fifth. It gets our Dangerous rating, which is based on an aggregation of ratings of 23 ETFs and 61 mutual funds in the Health Care sector. See a recap of our Q3’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Health Care sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 24 to 353). This variation creates drastically different investment implications and, therefore, ratings. Investors should not buy any Health Care ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Live Oak Health Sciences Fund (MUTF: LOGSX ) and the Saratoga Advantage Trust: Health & Biotechnology Portfolio (MUTF: SBHIX ) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums. The iShares S&P Global Healthcare Index Fund ETF (NYSEARCA: IXJ ) is the top-rated Health Care ETF and the Fidelity Select Medical Delivery Portfolio (MUTF: FSHCX ) is the top-rated Health Care mutual fund. Both earn a Neutral rating. BioShares Biotechnology Products (NASDAQ: BBP ) is the worst-rated Health Care ETF and Rydex Series Biotechnology Fund (MUTF: RYBOX ) is the worst-rated Health Care mutual fund. Both earn a Very Dangerous rating. 338 stocks of the 3000+ we cover are classified as Health Care stocks. HCA Holdings (NYSE: HCA ) is one of our favorite stocks held by Health Care ETFs and mutual funds and earns our Very Attractive rating. Since 2012, HCA has grown after-tax profit ( NOPAT ) by 5% compounded annually. HCA earns an impressive top-quintile return on invested capital ( ROIC ) of 15%. This high profitability has allowed HCA to become the largest hospital operator in the world. However, HCA shares are priced as if the company will see a significant decline in profits going forward. At its current price of $69/share, HCA has a price to economic book value ( PEBV ) ratio of 0.8. This ratio implies that the market expects HCA’s NOPAT to permanently decline by 20%, in spite of the profit growth achieved the past four years. If HCA can grow NOPAT by just 5% compounded annually over the next five years , the stock is worth $123/share today – a 78% upside. Athenahealth (NASDAQ: ATHN ) is one of our least favorite stocks held by Health Care ETFs and mutual funds and was put in the Danger Zone in April 2015. Since 2011, athenahealth’s NOPAT has declined by 43% compounded annually. Over the same timeframe, ROIC has fallen from 14% to a bottom quintile 0%. The biggest issue at athenahealth remains its inability to grow the business and rein in costs. However, as we’ve seen with other Danger Zone companies, investors have overlooked athenahealth’s problems by focusing on revenue growth, which has left ATHN overvalued. To justify its current price of $149/share, athenahealth must grow NOPAT 37% compounded annually for the next 23 years . This expectation seems rather optimistic given the sustained profit decline since 2011. Figures 3 and 4 show the rating landscape of all Health Care ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, sector or theme.

Despite Concerns, Investors Take A Risk-On Approach To Fund Investing

By Tom Roseen Banking on the recent three-week rally in equities, supported by better-than-expected first-time jobless benefit claims, a jump in home builder confidence in October, hopes that Beijing would continue to provide more stimuli to the Chinese economy, and housing starts being near eight-year highs, investors took a risk-on approach to fund investing during the fund-flows week ended October 21, 2015, injecting a net $6.3 billion into conventional funds and exchange-traded funds (ETFs). Investors turned their back on money market funds, redeeming $2.6 billion for the week, but they were net purchasers of the other three fund macro-groups, injecting some $4.4 billion into taxable bond funds, $4.3 billion into equity funds, and $0.2 billion into municipal bond funds for the week. For the third consecutive week taxable bond funds (including conventional funds and ETFs) witnessed net inflows of a little less than $4.4 billion, their largest weekly inflows since the week ended May 20, 2015. As fund investors became more risk seeking, they padded the coffers of corporate high-yield debt funds, which attracted the largest amount of net new money for the week of the major fixed income groups, taking in $3.3 billion (their second largest weekly net inflows on record and the largest since October 26, 2011). (click to enlarge) Source: Thomson Reuters Interestingly, the risk-on mentality was not equally applied to the equity side of the business. While authorized participants (APs) injected $4.5 billion into equity ETFs for the week, conventional fund investors were net redeemers of equity funds, withdrawing $0.2 billion from the group. Despite continued concerns about the Q3 earnings season and in anticipation that the Federal Reserve may delay raising interest rates until 2016, APs were net purchasers of domestic equity ETFs (+$3.2 billion), injecting money into the group for a second consecutive week. They also padded the coffers of nondomestic equity ETFs (to the tune of +$1.3 billion) for the sixth week running. In contrast, on the conventional funds side of the business, domestic equity funds-handing back $0.8 billion-witnessed their fourth consecutive week of net outflows. Meanwhile, their nondomestic equity fund counterparts witnessed $646 million of net inflows-attracting money for the first week in four.

How Will The Fed Impact GLD This Time?

Summary The price of GLD declined in the past few days as the U.S. dollar rallied. The FOMC meeting will convene again this week. How will the upcoming FOMC meeting impact the price of GLD? The U.S. dollar has changed course and rallied in the past few days, which also dragged back down SPDR Gold Trust ETF (NYSEARCA: GLD ). In times when central banks aim to provide more liquidity: The ECB may expand and extend its QE program and cut rates in December, People Bank of China reduced again its rates, and Bank of Japan may ramp up its QE program this week (although the chances are low for this upcoming meeting); it becomes less likely for the FOMC to raise rates. And as long as the Fed delays its rate hike to a later date, precious metals are likely to benefit from it. This week, the FOMC will convene again for its penultimate meeting for the year. This meeting won’t include an economic update or press conference. The current market expectations , as derived from the bonds market, are for only 6% chance of a hike announcement in the coming meeting. The most likely scenario is for the Fed to publish a succinct statement with little changes to the wording in order to keep the possibility of raising rates in December. If so, GLD isn’t likely to have much of a reaction. But what does it mean about the December meeting? The two mandates of the Fed relate to labor and inflation. Since the last meeting, the reports related to these two mandates aren’t making the decision any easier. From the labor market perceptive , the NFP and JOLTS weren’t impressive. And even though unemployment rate is low, wages aren’t picking up any faster with a steady growth rate of 1.9%. When it comes to inflation, the last CPI report showed the core CPI reached 1.9% – very close to the Fed’s target inflation of 2%. It still seems that the Fed may decide to err on the side of caution and maintain its rates low this year and only raise rates around Q1 2016. If the next two NFP reports show another slow growth in jobs (fewer than 150,000 jobs per months) and little change to growth of wages, these reports will make it a bit easier for the Fed to delay it decision to next year. The changes in market expectations over the timing of the Fed’s rate hike is demonstrated in the rise and fall of short-term interest rates in recent months, as you can see in the following chart. (click to enlarge) Source: U.S Department of Treasury and Google finance The latest rally of GLD isn’t only related to the depreciation of the U.S. dollar. But that’s not all. Its rally is plausibly related to the decline in interest rates. In the past few months, the changes in the market expectations of short-term interest rates are strongly correlated with the daily shifts in the price of GLD – the linear correlation is around -0.41 over the last four months. The gold market has benefited from the recent weakness of the U.S. dollar and fall in interest rates. And if the Fed issues another dovish report or even keep its statement unchanged, this could provide another short-term boost for GLD. But as other central banks aim to turn more dovish by cutting rates or increasing QE programs, the upward pressure on the U.S. dollar will intensify, which is likely to bring down GLD. Therefore, even if GLD were to rally in the near term as the Fed delays its rate hike, the actions taken by other central banks could bring back down GLD in the coming months. For more please see: ” GLD Continues to lose its appeal “.