Tag Archives: mutual funds

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.

FXIFX Is Proof That Fidelity Can Offer A Great Target Date Fund

Summary Fidelity has at least two target date funds for the same date. FFFEX offers investors a high expense ratio and a complicated batch of underlying holdings. FXIFX offers investors almost everything they could ask for in a target date fund. The ratio of domestic equity to international equity allocation is great. The fund is moving into inflation-protected bonds slightly sooner than I would, but the underlying fund is a good choice. Fidelity has multiple options for target date funds. A reader recently suggested I check out the Fidelity Freedom® Index 2030 Fund (MUTF: FXIFX ). The suggestion came after I looked into the Fidelity Freedom® 2030 Fund (MUTF: FFFEX ). The only difference in the names of the two funds is that one uses the word “Index”, but the difference between the funds is notable. Expense Ratios FXIFX has an expense ratio of only .16% on the net level and .24% on the gross level. The net expense ratio is very competitive with target date funds for Vanguard. Investors can replicate the portfolio with a lower expense ratio by manually managing their portfolio to the same allocations, but the difference in expense ratios between FXIFX and using individual allocations to the underlying funds is very reasonable for investors that don’t want to manage the portfolio themselves on a consistent basis. On the other hand, FFFEX had an expense ratio of .74% and appeared stuffed with actively managed funds that should be substantially more profitable for the sponsor. The annoying thing, in my opinion, is that some investors will find that their employer offers FFFEX but does not offer FXIFX. That is unfortunate because I think the lower expense ratio fund will win out over the longer term. I don’t believe the actively managed portfolios will be able to beat their passive counterparts by enough to overcome the difference in expense ratios. Allocations The allocations for FXIFX are quite solid. Take a look at the holdings below: The first thing to notice is that this list is fairly short. I like to see simple allocations in target date funds. A few underlying funds with low expense ratios and fairly passive strategies make for great holdings. Ideally those holdings should be rebalanced fairly frequently for a target date fund to take advantage of movements in the market price of the underlying holdings. Domestic to International The domestic allocation is about 2.25 times the international equity allocation. I like that allocation strategy. Some funds would go slightly heavier on the international equity allocation, but I find a ratio of 2.5 to 1 ratio is pretty much perfect and even going as heavy as 2.2 to 1 would be reasonable. This fund falls within that desirable range. There is plenty of international exposure to benefit from the diversification without betting heavily on international funds outperforming domestic equity. Inflation-Protected Bond Funds I see a good reason for including inflation protected bonds, but I wouldn’t mind seeing this remain fairly low for another five years since this fund is aiming for 2030. At less than 1%, this isn’t a meaningful allocation yet. The underlying allocation is the Fidelity® Series Inflation-Protected Bond Index Fund (MUTF: FFIPX ) which has an expense ratio of only .05%. I like the expense ratio; I’m just not big on inflation-protected bonds in the current macroeconomic environment for anyone that is still working. For a retiree, it is certainly understandable to keep a chunk of their portfolio in these securities for dealing with living expenses over the next 12 to 24 months. Personally, I prefer paying for most living expenses with interest income from corporate bonds (currently too weak) or dividend income from established champions. How About Some REITs? I’d love to see a small allocation to domestic equity REITs in the portfolio. Perhaps I’m biased as a REIT analyst, but I like domestic equity REITs as an allocation for a mutual fund that I would expect to only be held in tax advantaged accounts. The biggest drawback over the long term to investing in equity REITs is the potential for paying high levels of personal income taxes on the dividends. If the allocation is going to be within a tax advantaged account, then the income should bypass that difficulty. Of course, I don’t provide tax advice. Future Allocations The following chart shows the planned allocation over the next few decades: This is a great allocation strategy for a target date fund. The investor planning on a very long retirement will probably want to supplement this portfolio with some dividend growth investing to have a growing stream of income from high quality companies. In my view, investors shouldn’t plan to just hold the target date fund and assume that they are done investing. This is not the start and the end of retirement planning, but it is one reasonable piece to include inside the portfolio. Conclusion FXIFX is delivering on the most important metrics I want to see in a target date fund. It offers a low expense ratio, a simple allocation, and a very intelligent ratio of domestic equity to international equity. The only weaknesses I see are extremely minor issues compared to everything Fidelity got right in this fund. For any investors trying to pick between FXIFX and FFFEX, I see a clear winner. FXIFX looks like it should be able to win out over a very long time horizon.

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

Summary The Energy sector ranks last in Q4’15. Based on an aggregation of ratings of 21 ETFs and 59 mutual funds. OIH is our top-rated Energy ETF and FSESX is our top-rated Energy mutual fund. The Energy sector ranks last out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. The Energy sector funds won last place in the prior quarter as well. It gets our Dangerous rating, which is based on aggregation of ratings of 21 ETFs and 59 mutual funds in the Energy 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 Energy sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 150). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Energy sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. 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 The PowerShares Dynamic Oil Services ETF (NYSEARCA: PXJ ) is excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums. 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 Van Eck Market Vectors Oil Services ETF (NYSEARCA: OIH ) is the top-rated Energy ETF and the Fidelity Select Energy Service Portfolio (MUTF: FSESX ) is the top-rated Energy mutual fund. OIH earns an Attractive rating while FSESX earns a Neutral rating. The PowerShares DWA Energy Momentum Portfolio ETF (NYSEARCA: PXI ) is the worst-rated Energy ETF and the BP Capital TwinLine Energy Fund (MUTF: BPEAX ) is the worst-rated Energy mutual fund. Both earn a Very Dangerous rating. National Oilwell Varco (NYSE: NOV ) is one of our favorite stocks held by Energy ETFs and mutual funds. It earns our Attractive rating. Over the past four years, National Oilwell has grown after-tax profits ( NOPAT ) by 11% compounded annually. The company earns a return on invested capital ( ROIC ) of 8% and has generated over $1.1 billion in free cash flow on a trailing twelve-month basis. Across the energy industry, share prices have been collapsing over the past year, but National Oilwell’s business does not deserve the decline in its shares. At its current price of $38/share, NOV has a price to economic book value ( PEBV ) ratio of 0.6. This ratio implies that the market expects National Oilwell’s profits to permanently decline by 40% from current levels. If National Oilwell can grow NOPAT by just 1% compounded annually over the next five years , the stock is worth $80/share today – a 110% upside. It’s easy to see just how low the expectations baked into NOV have become. Tesoro Corporation (NYSE: TSO ) is one of our least favorite stocks held by Energy ETFs and mutual funds and earns our Very Dangerous rating. Since 2011, Tesoro’s NOPAT has declined by 1% compounded annually despite the oil industry witnessing high growth rates prior to 2014. Over the same timeframe, Tesoro’s ROIC has fallen to 6% from 12%. Despite the deterioration of the business, TSO has increased nearly 400% since 2011, which has left shares greatly overvalued. To justify its current price of $102/share, Tesoro must grow NOPAT by 10% compounded annually for the next 11 years. This scenario seems rather unlikely given that NOPAT has only declined lately. With such lofty expectations embedded in the stock price, it’s easy to see why Tesoro is one of our least favorite Energy stocks. Figures 3 and 4 show the rating landscape of all Energy 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.