Author Archives: Scalper1

QQQ ETF In Spotlight On Imminent Changes To Nasdaq Indexes

Nasdaq has recently announced changes to the composition of the Nasdaq 100 Index and the Nasdaq 100 Equal Weighted Index effective before market opens on February 22, 2016. The benchmark will remove KLA-Tencor Corporation (NASDAQ: KLAC ), one of the world’s leading suppliers of process control and yield management solutions for the semiconductor and related microelectronics industries, while CSX Corporation (NASDAQ: CSX ), a premier transportation company, will be added to both the index. Changes in this index often lead to alteration in the fund composition of ETFs closely tracking the index. This brings the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) – the largest and the most popular product in the large cap growth space – in focus. The fund tracks the Nasdaq 100 index, and as such, changes in the index are expected to alter the fund’s allocation. Both the fund and the index are rebalanced and reconstituted on a yearly basis. QQQ ETF in Focus Launched in March 1999, QQQ holds a basket 106 stocks. Its underlying index, the Nasdaq 100, includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq stock market based on market capitalization. Apple Inc. (NASDAQ: AAPL ) dominates the fund with 11.3% allocation, followed by Microsoft Corporation (NASDAQ: MSFT ) with 8.7% allocation. Apart from these two stocks, all the other individual securities have less than 6% exposure each in the fund. The stock to be removed from the index, KLA-Tencor, has an exposure of less than 1% in the fund. In terms of sector exposure, the fund is heavily concentrated in Information Technology, with 56.5% of assets invested. Consumer Discretionary and Healthcare also get double-digit exposure in this ETF, with 19.9% and 13.8% weightage, respectively. The fund manages an asset base of $34.8 billion and trades in heavy volumes of 42.5 million shares a day. The product is one of the cheapest in its space, charging 20 basis points as fees. QQQ currently carries a Zacks ETF Rank #3 or Hold rating with Medium risk outlook. QQQ has lost 0.6% in the last one month (as of February 16, 2016), compared to the 1.05% gain for the broad market fund the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) and 1.6% for the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ). In the year-to-date time frame, QQQ (down 10.4%) has underperformed as compared to DIA (down 6.7%) and SPY (down 6.9%). Being a tech-heavy fund, QQQ has witnessed a sluggish performance due to global growth concerns, a strengthening dollar, weak corporate earnings and uncertain timing of the next interest rate hike. The recent changes made in the index composition are unlikely to have any major impact on the fund’s composition.

4 Funds To Buy On Healthy Medical Sector Earnings

Ongoing worries, including weak global growth, strengthening dollar and the persistent slump in oil price, appear to have affected Q4 corporate earnings. Amid this dismal backdrop, the medical sector has emerged as one of the few bright spots. And the sector’s outlook for the coming quarters also looks impressive. As such, fundamentally strong funds from this sector may offer favorable investment propositions. Medical Sector Outperforms Total earnings of the 388 S&P 500 members that reported Q4 results as of Feb 17 declined 6.4% year over year on 4.6% lower revenues. And nine out of the 16 Zacks sectors are expected to suffer an earnings decline in their Q4 results. Total earnings for the S&P 500 members are expected to decline 6.7% year over year. In spite of the overall softness, companies from the medical sector that have reported as of Feb. 17 registered total earnings growth of 7.4% on 9.1% higher revenues. The sector is expected to witness earnings growth of 9.2% on 9.4% higher revenues for the quarter. Earnings and revenues for the sector are also expected to grow in 2016. For the ongoing quarter, the sector is predicted to register earnings and revenue growth of 3.8% and 8.4%, respectively. Some of the major players from this sector including Regeneron Pharmaceuticals (NASDAQ: REGN ), UnitedHealth Group Inc. (NYSE: UNH ) and Gilead Sciences, Inc. (NASDAQ: GILD ) posted impressive results for the fourth quarter. What Will Boost Medical Sector in 2016? The Affordable Care Act (ACA) is likely to play an important role in boosting the healthcare sector this year. With a gradual decline in the unemployment rate and healthy job additions over the past few months, new employees should widen the coverage of health insurance and perk up demand in the sector. Moreover, government spending on healthcare is also expected to rise nearly 4.9% this year. It is estimated that Medicare and Medicaid spending may increase to over $1.25 trillion in 2016. Further, merger and acquisition activities in the broader medical sector are expected to remain strong in 2016 and be significant catalysts to the sector’s growth. Separately, advancement in technology and innovation should also bode well for the space. Advances in genomics, biotechnology and artificial intelligence have not only helped the sector to grow over the past few years, but are also likely to be the growth drivers in the years to come. 4 Funds to Consider Given these encouraging earnings performance and promising outlook, we present four healthcare mutual funds that are significantly exposed to medical sector and carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the near future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. These funds have strong three- and five-year annualized returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load. T. Rowe Price Health Sciences (MUTF: PRHSX ) invests a major portion of its assets in common stocks of companies whose primary operations are related to health sciences. The fund focuses on investing in large- and mid-cap firms. PRHSX currently carries a Zacks Mutual Fund Rank #1 and has three- and five-year annualized returns of 20.6% and 21.2%, respectively. The annual expense ratio of 0.77% is lower than the category average of 1.36%. Fidelity Select Medical Equipment & Systems (MUTF: FSMEX ) seeks growth of capital. The fund invests the lion’s share of its assets in companies that are primarily involved in operations related to medical equipment and devices and the related technologies sector. The fund focuses on acquiring common stocks of both U.S. and non-U.S. companies. FSMEX currently carries a Zacks Mutual Fund Rank #1 and has three- and five-year annualized returns of 16.3% and 12.7%, respectively. The annual expense ratio of 0.77% is lower than the category average of 1.36%. Hartford Healthcare HLS IA (MUTF: HIAHX ) invests most of its assets in equities of healthcare-related companies of any size across the globe. The sub-adviser selects the equity securities and the issuers may be from other countries, including the U.S. cash balances of HIAHX are not expected to be more than 10% of its assets. HIAHX currently carries a Zacks Mutual Fund Rank #1 and has three- and five-year annualized returns of 18% and 17.4%, respectively. The annual expense ratio of 0.88% is lower than the category average of 1.36%. Fidelity Select Health Care Portfolio (MUTF: FSPHX ) seeks capital growth over the long run. The fund invests a major portion of its assets in companies involved in designing, manufacturing and selling healthcare products and services. The fund invests in companies across the world. FSPHX currently carries a Zacks Mutual Fund Rank #2 and has three- and five-year annualized returns of 21.2% and 18.2%, respectively. The annual expense ratio of 0.74% is lower than the category average of 1.36%.

The Best And Worst Of January: Long/Short Equity

Long/short equity mutual funds and ETFs posted losses in January, making it the fourth time in the past five months that the category failed to log gains. After suffering losses of 1.21% in December, the average fund in the category lost another 3.30% in the first month of 2016. This dipped the category average for the year ending January 31 into the red at -3.86%, compared to the S&P 500’s return of -0.67%. For the three-year period ending January 31, long/short equity funds have averaged annualized gains of just 2.77%. The S&P 500, by contrast, has returned +11.30% over that same time. Using the S&P 500 as a benchmark, long/short equity mutual funds and ETFs have generated -3.03% annualized alpha over the past three years, with an average beta of 0.53. The category’s three-year Sharpe ratio of 0.40 compares poorly with the S&P’s 1.03, and although long/short equity funds have had less volatility (8.30% per year versus 10.94%), it would be a stretch to characterize their aggregate performance as anything other than disappointing. Nevertheless, there were some standout performers in January, with the top fund generating gains of nearly 5%. The worst performers, however, really struggled, with losses ranging from over 10% to nearly 20%. Top Performers in January The three best-performing long/short equity mutual funds in January were: CMG Long/Short Fund A (MUTF: SCOTX ) Otter Creek Long/Short Opportunity Fund Inst (MUTF: OTTRX ) Catalyst Insider Long/Short Fund A (MUTF: CIAAX ) SCOTX was the top-performing long/short equity fund in January, posting monthly gains of 4.81%, but over the longer term, the fund’s performance has been dismal. For the year ending January 31, for instance, SCOTX returned -21.79%, and for the three-year period ending on that date, its annualized returns were -8.76%. The fund’s three-year alpha stood at a woeful -10.56%, on top of a 0.19 beta and a Sharpe ratio of -0.65. Long/short equity funds are supposed to have less volatility than long-only stocks, but SCOTX’s three-year standard deviation of 12.87% was higher than the S&P 500’s 10.94%. January’s second-best long/short equity fund, by contrast, added 3.49% in monthly gains, to bring its one-year returns to an outstanding +13.82%. These gains rank the fund at the very top of its Morningstar category, but since the fund only launched in late 2013, it doesn’t have three-year data available. CIAAX posted a 2.94% gain in January, bringing its one-year total through the end of the month to +6.37%. Over the three-year period, it posted annualized gains of 3.37%, consisting of 0.99% annualized alpha and a 0.31 beta. This gave the fund a three-year Sharpe ratio of 0.28, with high annualized volatility of 15.81%. Worst Performers in January The three worst-performing long/short equity mutual funds in January were: Catalyst Hedged Insider Buying Fund A (MUTF: STVAX ) Philadelphia Investment Partners New Generation Fund (MUTF: PIPGX ) Highland Long/Short Healthcare Fund A (MUTF: HHCAX ) STVAX, PIPGX, and HHCAX all had atrocious months in January: STVAX lost a whopping 19.24%, PIPGX fell 17.54%, and HHCAX tumbled 10.29% in just 31 calendar days. This put all three funds deep into the red for the year ending January 31: -30.28%, -33.07%, and -17.23%, respectively. All three of the worst performers have been around for more than three years, with respective returns of -12.75%, -13.64%, and +8.84% – HHCAX is the one fund with longer-term gains. Its three-year alpha, beta, and Sharpe ratio of +5.92%, 0.33, and 0.61, respectively, are better or roughly as good (its 0.33 beta isn’t as attractive as CIAAX’s 0.31) as that of any fund reviewed this month, although its three-year annualized volatility of 15.78% is among the highest of all long/short equity funds with 3-year track records. STVAX and PIPGX, by contrast, fail across the board. Their respective three-year alphas of -29.18% and -25.06%, respectively, are at the bottom of the category; their betas of 1.60 and 1.02, respectively, are among the highest in the category and much higher than that of typical long/short equity funds; their Sharpe ratios of -0.51 and -0.95, respectively, show they’re a bad risk/reward proposition; and their annualized volatilities of 21.90% and 14.29%, respectively, are far higher than that of the broad market. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.