Tag Archives: biotechnology

XLV: Getting Your Dose Of Pharmaceuticals And Biotechnology In A Single Source

Summary XLV is a Health Care ETF with the heaviest allocations going to Pharmaceuticals and Biotechnology. The returns figures look fairly volatile in a regression analysis which makes it substantially more difficult to diversify away the excess risk. The nice thing for shareholders is that they would be holding the very companies that are establishing the prices for the medicine they may consume. 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. One of the funds I am assessing is the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ). 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 for Health Care Select Sect SPDR ETF is .15%, which isn’t too bad at all. I’d love to see the expense ratio go under .10%, but .15% is within reason and not too bad for giving investors exposure to the Health Care sector. Remember that the Biotechnology sector is also within the Health Care sector which makes it more volatile. Largest Holdings (click to enlarge) I don’t see anything to complain about here. The top holdings for the ETF almost perfectly mirror the index so investors should expect the portfolio to have very similar returns. Given the low expense ratio, a fairly passive indexing strategy is usually the result. I’m fine with that. Passive indexing is a solid strategy over the long term. Looking at the individual companies, I like seeing Johnson & Johnson (NYSE: JNJ ) at the top of the holdings. This is a strong dividend company that offers investors some stability. Their product lineup is diverse enough that they are largely protecting from minor shifts in the economy and positioned to benefit from an aging population requiring more medicine. Sector The largest weighting by sector is clearly the pharmaceuticals rather than biotechnology stocks. As a result of this sector diversification the fund is dramatically more stable than peers that are heavily invested in biotechnology companies. On the other hand, the returns for it have also been materially weaker. Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include a the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. 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. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. 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. (click to enlarge) Conclusion XLV is substantially less risky than the XBI. Since XBI is almost exclusively biotechnology companies, I’m not surprised that XLV is so much safer. Of course, it is still a fairly risky investment in its own right. The ETF has a beta higher than 1.00 so it will naturally be increasing the risk level on most traditional portfolios. The correlation with the S&P 500 stands at .88 which is high enough that it may be a concern. The bigger issue, in my opinion, is that XLV has a weaker negative correlation with the kind of long term bond holdings that investors would use to reduce portfolio volatility. In this case, that is demonstrated by having a negative correlation with BLV of only -.23 compared to -.29 for the S&P 500. I would treat XLV as a fairly aggressive allocation. If investors intend to bring their portfolio volatility significantly below the S&P 500, it will be more difficult if the allocations to XLV are significant. Despite the volatility, I do like the exposure within the portfolio. A heavy exposure to the pharmaceutical companies makes sense when an investor expects to be practically forced to buy their products in the future. While the portfolio has more volatility under modern portfolio theory, it does allow investors to benefit as shareholders if prices (and profits) from the pharmaceutical and biotechnology sector increase. 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.

Recent Volatility Providing Potential Buying Opportunity In The Biotechnology Space

Summary IBB was pulled back roughly 20% from its 52-week high this week with shares plunging from $400 to $320 per share during the recent market weakness. Persistently low oil prices, fear of an imminent rate hike and weakness in China have indiscriminately pulled down all indices over the past week. These external events are largely extraneous to the biotechnology sector and thus may present a buying opportunity throughout pullbacks if adding to a position or initiating a new position. Medical and prescription drug expenditures are projected to grow at an average rate of 5.8% and 6.3% annually through 2024, respectively. Taken together, this may present a potential buying opportunity especially given the recent market volatility. Introduction: The confluence of persistently lower oil prices, fear of an imminent rate hike and more notably weakness in China have indiscriminately plummeted all indices over the past week. These external events are largely extraneous to the biotechnology cohort yet this group has been taken along for the downhill ride with the broader indices. The biotechnology sector has been on an unprecedented performance streak in both annual and cumulative performance over the past 10 years and accentuated during the latest 5 year timeframe however lately this streak has been tested during the recent market volatility. The biotechnology sector can be highly volatile, however I posit that this cohort has not only established itself as a secular growth sector but these latest events are unrelated to the biotech sector and thus this recent pullback may provide a potential opportunity to add to a current position or initiate a position over time as this correction unfolds. Using The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) as a proxy, based on annual and cumulative performance throughout both bear and bull markets, IBB may provide the opportunity investors have been waiting for in the face of the current market downturn. IBB is touched down to register a 20% decline from its 52-week high, shares have plunged from $400 to $320 at one point per share during the recent market weakness, presenting a potential buying opportunity. Growth expenditures as a rational for buying on major pullbacks: Per the Centers for Medical and Medicaid Services, medical expenditures are projected (from 2014 through 2024) to grow at an average rate of 5.8% per year. This translates into 1.1% faster than GDP throughout this time period thus the healthcare expenditures as a percentage of GDP are expected to rise from 17.4% in 2013 to 19.6% by 2024. Despite several years of growth below 5%, health spending is projected to have grown 5.5% in 2014. Faster health spending due mainly to ACA health insurance coverage and rapid growth in prescription drug spending. The domestically insured is projected to have increased from 86% in 2013 to 89% in 2014 as 8.4 million individuals are projected to have gained coverage. Post 2014, national health spending is projected to grow at a 5.3% clip in 2015 and peak at 6.3% in 2020. Given these projections, this scenario bodes well for the biotechnology sector as more individuals have access to health coverage and prescription drugs. In terms of prescription drug expenditures, spending is projected to have grown 12.6 percent in 2014 to $305.1 billion. Driving growth were new specialty drugs and increased prescription drug use among people who were newly insured. Prescription drug spending growth is projected to average 6.3% annual growth from 2015 through 2024. Taken together, as the biotechnology sector continues its innovation and continuous supply of medications to treat and cure many different diseases coupled with the growth in overall medical spending may present an investment opportunity especially given the recent market volatility. Secular growth case for buying on major pullbacks: In addition to case outlined above (e.g. highlighting the disconnect between the events bringing down the broader indices and the biotechnology sector on a whole) the biotech sector has displayed its resilience in both bear and bull markets with secular growth. The returns for IBB have been very impressive in both annual and cumulative performance, unparalleled by any major index. Over the past 10 and 5 year time frames, IBB has posted cumulative returns of over 360% and 325%, respectively. These results are unrivaled by any major index, outperforming on a 10 year cumulative basis of 295%, 240% and 300% for the S&P 500, Nasdaq, and Dow Jones respectively (Figure 1). These returns are accentuated during the previous 5 years. IBB notched cumulative returns of 325%, outperforming the S&P 500, Nasdaq and Dow Jones by 245%, 215% and 265%, respectively (Figure 2). IBB has cumulatively outperformed all indices by roughly 3-fold and 2.5-fold over the 10 year and 5 year time frames, respectively (Figures 1 and 2). (click to enlarge) Figure 1 – Google Finance comparison of IBB returns relative to the S&P 500, Nasdaq, Dow Jones over the previous 10 years (click to enlarge) Figure 2 – Google Finance comparison of IBB returns relative to the S&P 500, Nasdaq, Dow Jones over the previous 5 years IBB has displayed impressive resilience in the face of the market crash in 2008, the bear markets of 2011 and the very volatile market thus far in 2015. During the market crash of 2008, IBB posted an annual return of -12.2% while the S&P 500, Nasdaq and Dow Jones posted returns of -37.0%, -40.0% and -31.9%, respectively (Figure 3). During the bear market of 2011, IBB posted an annual return of 11.7% while the S&P 500, Nasdaq and Dow Jones posted returns of 2.1%, -0.8% and 8.4%, respectively (Figure 3). Thus far during the highly volatile market of 2015, IBB posted an annual return of 13% while the S&P 500, Nasdaq and Dow Jones posted returns of -5.8%, -0.8% and -8.6%, respectively (Figure 4). These data suggest that IBB outperforms during bear markets and thus has established itself as a secular growth sector and in the face of unrelated economic events may provide a buying opportunity. (click to enlarge) Figure 3 – Morningstar comparison of IBB annual returns relative to the Nasdaq over the previous 10 years (click to enlarge) Figure 4 – Google Finance comparison of IBB annual performance thus far in 2015 relative to the S&P 500, Nasdaq and Dow Jones Conclusion: As the confluence of these economic events seemingly disconnected in bringing down the biotechnology sector coupled with expenditure growth in overall health and prescription drug spending, it may be a good time to consider capitalizing on this correction via adding to existing positions or initiating a new position in this cohort given this opportunity. Being opportunistic and capitalizing on the recent volatility on pullbacks to slowly add to or initiate a position may be the opportunity investors have been waiting on to pounce on IBB. Data suggests, provided a long-term position that volatility within the biotech sector is negated by its long-term performance that is unparalleled by any major index. This sector provides high returns unrivaled by any major index with moderate risk (based on its resilience during the bear markets of 2008 and 2011 and thus far in 2015) and volatility. IBB may be providing investors with a great opportunity to add or initiate a position for any long portfolio desiring exposure to the biotechnology sector with a long-term time horizon given the recent market conditions. References: CMS.gov Statistics Trends and Reports Disclosure: The author currently holds shares of IBB and is long IBB. The author has no business relationship with any companies mentioned in this article. I am not a professional financial advisor or tax professional. I wrote this article myself and it reflects my own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. I am an individual investor who analyzes investment strategies and disseminates my analyses. I encourage all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, I value all responses. Disclosure: I am/we are long IBB. (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.

3 Healthcare Mutual Funds Poised For A Surge

The healthcare sector is coming off a strong Q1 of 2015, with over 80% of the companies in the sector beating earnings estimates. The recent success of this sector is partially the result of the Affordable Care Act. Another positive for this sector is that the demand for such services usually remains unchanged even during an economic downturn and investments in the sector provide sufficient protection to the capital invested. Healthcare mutual funds provide the perfect avenue for investors looking to invest in this sector. Below we will share with you 3 top healthcare mutual funds. Each has earned either a Zacks #1 Rank (Strong Buy) or a Zacks #2 Rank (Buy) as we expect these mutual funds to outperform their peers in the future. VALIC Company I Health Sciences (MUTF: VCHSX ) invests a majority of its assets in common stocks of healthcare products, medicine or life sciences related companies. VCHSX focuses mainly on investing in large and mid-cap companies. A maximum of 35% of VCHSX’s assets is invested foreign companies. The VALIC Company I Health Sciences fund has returned 46.2% over the past one year. Taymour R. Tamaddon is the fund manager and has managed VCHSX since 2013. Fidelity Select Health Care Portfolio (MUTF: FSPHX ) seeks capital growth over the long run. FSPHX invests a lion’s share of its assets in companies involved in designing, manufacturing and selling of healthcare products and services. FSPHX invests in companies throughout the globe. The Fidelity Select Health Care Portfolio is non-diversified fund and has returned 40.6% over the past one year. FSPHX has an expense ratio of 0.74% as compared to category average of 1.37%. Fidelity Select Biotechnology Portfolio (MUTF: FBIOX ) invests a lion’s share of its assets in companies primarily involved in research, development, manufacture, and distribution of various biotechnological products. Factors such as financial strength and economic condition are considered to invest in companies located all over the world. The Fidelity Select Biotechnology Portfolio is non-diversified fund and has returned 59.7% over the past one year. As of March 2015, this fund held 214 issues with 8.16% of its assets invested in Biogen Inc. Original Post Share this article with a colleague