Tag Archives: seeking-alpha

A Seasonal Healthcare Portfolio Using VHT

Summary At the request of a reader, I modified my previous biotech portfolio to focus on healthcare. The result of applying the seasonal data of the healthcare industry was a portfolio that outperformed buy-and-hold strategies, both on VHT and SPY. This six-trades-per-year strategy produces improved performance and dividends with decreased risk. (click to enlarge) Another reader request for a modification of the seasonal biotech portfolio : In this case, Lisa wants to build a seasonal portfolio that can effectively invest in the Vanguard Health Care ETF (NYSEARCA: VHT ). I will help her develop such a strategy and back test it against a buy-and-hold strategy, as well as holding the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). Why VHT and not XLV? Though I thought about using the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ) instead of VHT, as it is immensely more popular than VHT as a tool to gain exposure to the health care industry, I decided that Lisa was right in her first choice of VHT. An important reason to use VHT in place of XLV is its dividend. In a seasonality based portfolio, we will be ditching the healthcare ETF at certain times to avoid the opportunity cost associated with the healthcare down season. However, both VHT and XLV pay out dividends. So, another downside arises: missing out on the dividend. VHT is the superior choice here because – as you will later see – we will always be holding VHT at the ex-dividend date, allowing us to gain all the dividends of VHT while not being forced to hold the ETF during underperforming seasons. VHT’s ex-dividend date for its annual dividend (XLV pays quarterly dividends; hence the problem) is usually in December, which is a good time for healthcare stocks. However, this year, the ex-dividend date was in late September. But this does not damage our strategy, as we will also be long on VHT in September. The Seasonality In my original strategy on the seasonal portfolio strategy for the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ), we were long on IBB during November to January, long on utility stocks via the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) from February to May, and stayed out of the market the rest of the year (sell in May), with the exception of holding gold during September, which is when gold tends to outperform. However, simply replacing IBB with VHT in this strategy is arbitrary. Hence, I looked into the seasonality of the health care sector. I found many academic studies on the subject in scholarly journals, most of which concluded the same thing: Health care does best in the fall and winter. A study performed by Equity Clock over the past 20 years produced the following image and the one you saw at the beginning of the article, which both generally sum up what the journals were telling us: stick with health care during fall and winter but drop it afterward. This leaves us with some clear modifications to our previous seasonal portfolio. The act of holding VHT from September to February changes our strategy in the following ways. We no longer need to hold gold, as VHT’s seasonality overlaps with gold. VHT’s seasonality slightly overlaps with XLE, reducing our exposure to XLE by one-third; we will still be in by the ex-dividend date. If we do not add anything to our strategy, we will only be holding two ETFs all year: VHT in the fall and winter; XLE in the spring. So what about the summer? Do we just stay out of the market? Jeroen Blokland, Seeking Alpha contributor, has already answered this question. The solution, according to Blokland, is to hold the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ). This gives us a complete strategy: At February’s close: Sell VHT and Buy XLE A few days before April’s close (check IEF’s ex-dividend date for May): Sell XLE and Buy IEF At August’s close: Sell IEF and Buy VHT The Dividends Ignoring the performance of this strategy and looking at dividends alone, we see we gain exposure to all the dividends we can. A different strategy – for example one in which we buy XLE after March or VHT after September – could result in a drastically lower amount of dividends payouts. It is mere coincidence – and luck – that the strategy that should perform best also gives us full dividend exposure. VHT: Receive one annual dividend payout in September (or possibly December). XLE: Receive one quarterly dividend payout in March. IEF: Receive five monthly dividend payouts (we’ll be on the cusp ends of both May and September’s dividend payouts). And that’s in addition to the performance we can expect from the seasonality of these industries. Let’s now see how this strategy measures up: Results and Conclusion for Investors First, a notation issue: SPY_HOLD: Holding the SPY year-round VHT_HOLD: Holding the VHT year-round SECTOR: The strategy as outlined above The results: As you can see, the SECTOR strategy gives us the best risk vs. reward ratio. The strategy would have allowed us to reduce the downdraw resulting from the 2008 market crash while maintaining a level of growth exceeding both the SPY and the VHT alone. This portfolio has the highest Sharpe ratio – 0.78 – with the lowest max drawdown – -31.37%. In 2014, had you applied the three different portfolios with $100,000, the dividend payouts would have been (without reinvesting dividends): SPY_HOLD: $1832.01 VHT_HOLD: $1130.56 SECTOR: $487.24 (from XLE), $862.12 (from IEF), $1200.71 (from VHT) = $2550.07 Notice that the dividends we receive just from the VHT part of our portfolio exceed that of a VHT buy-and-hold strategy. This is because we are buying VHT with more than $100,000, as XLE and IEF grow our $100,000 into more capital to be used for the VHT purchase. Thus, we come out with more shares of VHT, equaling more dividends, even though we bought VHT later than buy-and-hold investors, whom we can assume bought the stock at a lower price. Overall, this strategy has three main advantages over the buy-and-hold strategies we looked at. First, it has improved cumulative performance. Second, it has the lowest max drawdowns. Third, it has the highest dividend payout. What’s the downside? I can think of two. First is the tax issue, which varies across individuals. If you’re playing this in an IRA, you can come out okay. The second is the increased commissions, as you’ll be making six trades per year, as opposed to one. In the end, you must decide whether the time invested in a seasonal strategy is appropriate for the increased gains and dividends. If you’re interested in seeing some tweaks to this strategy, ask me in the comments section or via mail. I’ll be rolling out my premium Seeking Alpha backtesting newsletter soon, in which I backtest your strategies. For example, if you want to see the above SECTOR strategy tested with different ETFs as the forerunners, just leave your ideas below.

How These 4 ETFs Will Benefit From A Rate Hike

With excellent October jobs data, the interest rates hike for December is back on the table. The U.S. economy added 271,000 jobs in October, much above the market expectation of 180,000 and representing the strongest pace of a one-month jobs gain in 2015. The Fed in its latest FOMC meeting also hinted at a December lift-off if the U.S. economy remains on track. In a recent Wall Street Journal poll, about 92% of the economists believe that the first interest rate hike in almost a decade will come at the December 15-16 policy meeting, while 5% expect the Fed to wait until March. The rest expect the Fed to keep cheap money flowing for longer. This is especially true as recent headwinds have faded with substantial positive developments seen in the global economy and financial market lately. In particular, the Chinese economy is showing signs of stabilization on the back of better-than-expected GDP growth data and another rate cut while the Japanese and European central banks are seeking additional stimulus measures to revive their economies (read: China Investing: Should You Buy These New ETFs? ). Further, the U.S. economy is showing an impressive rebound after a lazy summer and is continuing to outpace the other economies. Though the manufacturing sector expanded at its slowest pace in more than two years in October on a weak global economy and strong dollar, rise in new orders spread some hopes in the sector. Consumer confidence picked up in October, as measured by the Thomson Reuters/University of Michigan index, which rose to 90 after dropping to 87.2 in September from 91.9 in August. Unemployment dropped to a new seven-year low to 5% in October from 5.1% in September and average hourly wages accelerated by 9 cents to $25.20 bringing the year-over-year increase to 2.5%, the sharpest growth since July 2009. The solid pay gains will increase consumer spending in the crucial holiday season, which will translate into stepped-up economic activities. Given the recently improving fundamentals, an increase in rates seems justified. As a result, investor should focus on the areas/sectors that will benefit the most in the rising rate environment. Here, we have detailed four of these and their best ETFs below: Financials A rising interest rate scenario would be highly profitable for the financial sector. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. A broad way to play this trend is with the Financial Select Sector SPDR ETF (NYSEARCA: XLF ) , which has a Zacks ETF Rank of 2 or a ‘Buy’ rating with a Medium risk outlook (read: Rate Hike Coming in December? Financial ETFs & Stocks to Buy ). This is by far the most popular financial ETF in the space with AUM of $18.8 billion and an average daily volume of over 37.2 million shares. The fund follows the Financial Select Sector Index, holding 89 stocks in its basket. It is heavily concentrated on the top three firms – Wells Fargo (NYSE: WFC ), Berkshire Hathaway (NYSE: BRK.B ) and JPMorgan Chase (NYSE: JPM ) – with over 8% share each while other firms hold less than 6.2% share. In terms of industrial exposure, banks take the top spot at 37.2% while insurance, REITs, capital markets and diversified financial services make up for double-digit exposure each. The fund charges 14 bps in annual fees and has lost 1.2% in the year-to-date timeframe. Consumer Discretionary Consumer discretionary stocks also seem a good bet in the rising rate scenario. This is because these typically perform well in an improving economy justified by the healing job market, recovering housing market, surging stock market and expanding economic activities. Further cheap fuel is an added advantage for this sector. One exciting pick in this space can be the Vanguard Consumer Discretionary ETF (NYSEARCA: VCR ) , which has a Zacks ETF Rank of 1 or a ‘Strong Buy’ rating with a Medium risk outlook. This fund follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 384 stocks in its basket. This is the low choice in the space, charging investors just 12 bps in annual fees while volume is also solid at nearly 153,000 shares a day. The product has managed over $2 billion in its asset base so far. It is pretty spread out across sectors and securities with a slight tilt toward Amazon (NASDAQ: AMZN ) at 7%, while other firms hold no more than 5.7% share. Internet retail, restaurants, movies and entertainment, and cable & satellite are the top four sectors accounting for over 10% of total assets. VCR has gained 8% so far this year. Short-Term Treasury Though the fixed income world is the worst hit by the rising rates scenario, a number of ETFs that employ some niche strategies like the iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) could lead to huge gains. This product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays U.S. Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF with AUM of just $2.5 million. The note has surged 4.6% in the year-to-date timeframe. Negative Duration Bond Negative duration bond ETFs offer exposure to traditional bonds while at the same time short Treasury bonds using derivatives such as interest-rate swaps, interest-rate options and Treasury futures. The short position will diminish the fund’s actual long duration, resulting in a negative duration. As a result, these bonds could act as a powerful hedge and a money enhancer in a rising rate environment. Currently, there are a couple of negative duration bond ETFs, out of which the WisdomTree Barclays U.S. Aggregate Bond Negative Duration ETF (NASDAQ: AGND ) has AUM of $17.9 million and average daily volume of 13,000 shares. This ETF tracks the Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration. The benchmark provides long positions in the Barclays U.S. Aggregate Bond Index, which consists of Treasuries, government bonds, corporate bonds, mortgage-backed pass-through securities, commercial MBS & ABS, and short positions in U.S. Treasuries corresponding to a duration exceeding the long portfolio, with duration of approximately negative 5 years. Expense ratio came in at 28 bps. The product has gained 0.3% so far this year. Link to the original post on Zacks.com

Asset Class Update: Is Diversification Still A Free Lunch?

One might be led to believe that underwhelming performance in the large-cap benchmark might imply overwhelming performance elsewhere. When the bulk of risk asset classes are firing on all cylinders in a strong economy with reasonable valuations and desirable credit spreads, I am more inclined to pursue the free lunch of greater diversification. Right now, however, diversification across asset types and within asset types is a hindrance. According to Barry Ritholtz of Ritholtz Wealth Management, a frequent contributor to CNBC as well as Bloomberg, ” the beauty of diversification is that it’s about as close as you can get to a free lunch in investing.” Since 2011, however, investors who diversified in stocks outside of the U.S. and who diversified across other asset types (e.g., commodities, currencies, gold, pipeline partnerships, etc.) have consistently underperformed the plain vanilla approach of owning the S&P 500 SPDR Trust (NYSEARCA: SPY ) alongside a modest buffer of Vanguard Total Bond Market (NYSEARCA: BND ). Of course, the S&P 500 itself has struggled year-to-date (through 11/16). The price has essentially flat-lined over ten-and-a-half months at 0%. It follows that one might be led to believe that underwhelming performance in the large-cap benchmark might imply overwhelming performance elsewhere. After all, this is where diversification should shine. So, then, has the “free lunch” of diversification finally make a comeback? Hardly. Consider the list of 16 asset types and accompanying exchange-traded vehicles in the table below. An investor or money manager who dutifully maintained an allegiance to diversifying across asset classes (e.g., stocks, bonds, currencies, commodities, etc.) as well as within those classifications (e.g., small, large, foreign, domestic, short, long, investment grade, higher-yielding, etc.) is not being rewarded for the effort. In some corners, the risk-adjusted negative returns might be superior to the risks associated with a large-cap-only portfolio. After four years, however, faith in the free lunch of diversification may be dissipating. It gets worse. As the end of 2015 approaches, tax-loss harvesters may decide that it is better to get rid of year-to-date losing propositions such as the iShares Russell 2000 ETF (NYSEARCA: IWM ), the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ), the SPDR Gold Trust ETF (NYSEARCA: GLD ) and the Vanguard REIT Index ETF (NYSEARCA: VNQ ). Meanwhile, the proceeds may flow back into the large-cap stock arena, where marginal gains still look better on paper than the losses from the less-than-desirable diversified results. On the other hand, you might not want to bet the house on a Santa Claus rally for the S&P 500 either. Granted, the large-cap barometer rocketed more than 10% off its 2015 lows (1867) in October, but it has been unable to make it back to its record high (2130) set in May. Why didn’t U.S. large-company stocks fully recover? The narrow breadth in risk asset leadership has acted like an anchor on the biggest of the big corporations. In other words, if mid-caps, small-caps, micro-caps, emerging markets, foreign developed markets, pipeline partnerships, REITs and high-yield bonds are all going to get knocked out like Ronda Rousey in the “Octagon,” there’s certainly no guarantee that large corporate shares will buck the prevailing trend. A faltering global economy (macro-econ), equity overvaluation (fundamentals) and weakening marker internals (technicals) led me to reduce risk before the August sell-off . For example, most moderate growth and income clients may have had 65%-70 stock (e.g., large, small, foreign, etc.) and 30%-35% income (e.g., short, long, investment grade, cross-over, higher-yielding, etc.). We shifted to 50%-55% equity, 25% bond, and 20%-25% cash to lower the exposure to risk assets of any kind. Equally important, we lowered the risk profile itself, where stocks were primarily domestic and bonds were primarily intermediate investment grade. The technical retest of the September lows coupled with key moves about trendline resistance led us to bump the large-cap equity component up to 60%, while leaving the 25% investment grade and 15% cash intact. That said, the current profile is still less exposed to risk than 65%-70% growth (e.g., large, small, foreign, etc.) and 30%-35% income (e.g., short, long, investment grade, cross-over, higher yielding, etc.). When the bulk of risk asset classes are firing on all cylinders in a strong economy with reasonable valuations and desirable credit spreads, I am more inclined to pursue the free lunch of greater diversification. Right now, however, diversification across asset types and within asset types is a hindrance. For a 60% (mostly large-cap domestic), 25% bond (mostly investment grade) and 15% cash/cash equivalent mix , I am employing stock ETFs like the iShares Core S&P 500 ETF (NYSEARCA: IVV ), the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) and the Technology Select Sector SPDR ETF (NYSEARCA: XLK ). I am also using bond funds like the iShares 3-7 Year Treasury Bond ETF (NYSEARCA: IEI ), the SPDR Nuveen Barclays Municipal Bond ETF ( TFI) and the Vanguard Total Bond Market ETF ( BND ). For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.