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Trading The VIX: I Want Volatility With My Volatility ETF

On May 19, AccuShares rolled out two new volatility ETFs–VXUP and VXDN–that were advertised to track the spot VIX without suffering the losses that plague conventional volatility ETFs like VXX. It has now been 1 month since these funds started trading and while VXUP and VXDN have achieved a portion of their objective, they have failed spectacularly in another. This article discusses the mechanics of VXUP and VXDN, compares their performance over the past month to the spot VIX and VXX, and offers alternative investment ideas. Investing in the VIX has long been a challenge for investors. Because direct investment is not possible for the average trader, an assortment of ETFs have been created to facilitate the process. The most popular of these is the iPath S&P 500 VIX Short Term Futures ETF (NYSEARCA: VXX ), although many others, including inverse and leveraged products, are also available. Unfortunately, these ETFs are all based on VIX futures contracts and inevitably underperform the VIX over the long-term, making them exceptionally difficult investments. I was therefore very excited to learn that a new pair of VIX ETFs would be entering the marketplace in mid-May that were designed to track the spot price of the VIX and to avoid futures contracts. One, the AccuShares Spot CBOE VIX UP Shares (NASDAQ: VXUP ) was designed to directly track the spot VIX while the other, the AccuShares Spot CBOE VIX DOWN Shares (NASDAQ: VXDN ) would trade inversely to the spot VIX. Could these be what volatility ETF investors have long been waiting for? It has now been one month since these new products began trading. This article analyzes the performances of VXUP and VXDN in their first month of trading and compares them to the spot VIX and VXX. VIX ETFs that use futures contracts to track the VIX are limited by the fact that VIX futures contracts expire after one month. As a result, these funds must sell their contracts by the end of each month and rotate them into the next month’s futures contract. They typically do this on a daily basis, rotating between 4% and 5% each day to rotate the entire equity of the fund in each 20- or 25-day month. Unfortunately, the VIX futures market usually trades in a steep contango, a situation where subsequent contracts are more expensive than current contracts. Figure 1 below shows the current VIX futures contracts for the next six months as of Monday’s close showing this contango. (click to enlarge) Figure 1: VIX Futures Contracts for July through December as of Monday’s close showing persistent contango with the August contrast nearly 7% more expensive than the August contract. [Source: YahooFinance ] The August 2015 futures contract is trading at a 6.8% premium to the current front month July 2015 contract. As a result, VXX is currently selling July 2015 contracts and using the funds to buy August 2015 contracts. As of Monday evening, the fund holds 82% July contracts and 18% August contracts. Over the coming weeks it will rotate 4% of its funds per day from July into August contracts. As a result, the fund is effectively selling low and buying high. Should the contango hover around 7%, the fund will suffer a daily loss of 0.04 * 0.07, or 0.28%. This is a small loss for those trading these funds on a short-term basis, but over time it adds up. Figure 2 plots VXX versus the front-month VIX contract it is designed to track over the last 1 year. (click to enlarge) Figure 2: VXX versus VIX over the past 1 year showing steep underperformance of VXX due to rollover losses. [Source: YahooFinance ] As the data above shows, VXX massively underperforms the front-month VIX futures contract, losing 41% over the last year while the VIX gained 13%. With 260 trading days, the 28% underperformance amounts to a 1-year average of 0.11% per day. This is a significant amount of drag for an investor long VXX waiting for a volatility spike. The natural gut reaction to this data would be to just short the ETF and kick back and let the profits roll in. However, this is also an inherently risky strategy. While VXX may underperform over the long-term, it can spike dramatically during market swoons. For example, during the summer of 2011 during the European Crisis, VXX jumped from $331 on July 22 to $909 on October 3, a short-breaking 174% gain. With the VIX trading at 12.74 as of Monday’s close well below its long-term average of 19 and with Greece teetering on the edge of another crisis, I would be reluctant to be short here. Due to this challenging set of trading conditions for ETFs such as VXX, investors have long clamored for an alternative ETF that did not have the limitations of futures-based VIX ETFs. Enter AccuShares. On May 19, the company released VXUP and VXDN for trading. Unlike VXX and its ilk for which the underlying index is the front month VIX Futures contracts, the underlying index for these two ETFs is the CBOE Volatility Index itself, the VIX. This should, in theory, prevent rollover losses. The management of the two is very complex. Briefly, VXUP and VXN operate as a pair and swap assets back and forth as the VIX fluctuates. Neither fund holds futures contracts, but just cash and cash equivalents such as treasuries. Each of the funds operates around a “Distribution Period” on the 15th of each month, at which point the value of the fund that gained the previous month is adjusted with payout of a cash dividend reducing its value to that of the declining fund. For example, let’s say that VXUP and VXDN each start the month out at $20/share and the VIX starts at 15. The VIX rallies 20% to 18. VXUP would be predicted to rise to $24 and VXDN would be predicted to decline to $16. At the end of this month, holders of VXUP would receive a $8 dividend in either cash or in an equal value of VXDN and the value of VXUP would be adjusted to $16, and both funds would start the next monthlong period at the same price. Finally, if the VIX is less than 30 (which it almost always is), 0.15% is transferred from VXUP to VXDN on a daily basis to provide an incentive to invest in the inverse ETF. The reasoning is that the VIX will eventually spike and investors are therefore less likely to want to buy-and-hold VXDN. At least, that is how everything is supposed to work in theory. However, this is not a discussion on the complex mechanics of these funds, but rather an analysis of their performance. Between May 19 and June 22, the VIX was remarkably flat, declining just 0.9% over the monthlong period. During the same period, VXUP declined 1.5%, a small 0.6% underperformance. VXDN gained 0.4%, a 0.5% underperformance. In contrast, VXX declined 8.8%, a much larger 7.9% underperformance. Further, VXUP and VXDN did not seen the same decay that plagues VXX and similar funds. Figure 3 below compares the monthly performance of VXUP and VXDN along with an “average” percent return between the two. If there was inherent decay and underperformance, the “average” return would be expected to steadily decline. For example, VXUP and VXDN might initially be up or down 4%, respectively, but by the end of the month would be up 8% and down 12%, respectively, for an “average” of -2%, indicating decay. (click to enlarge) Figure 3: VXUP and VXDN performance over the past month along with an average of the two showing minimal decay of the funds that would be expected of a fund based on Futures contracts such as VXX. [Source: YahooFinance ] Based on Figure 3, VXUP and VXDN trade in nearly perfect opposition over the course of the month with the average percent return between the two flat near zero indicating minimal decay. Based on these performance numbers alone, these two new ETFs look promising. However, this does not paint the entire picture. Figure 4 below plots the percent change in VXUP versus VIX over the past month. (click to enlarge) Figure 4: VXUP versus VIX over the past month showing the large volatility shortfall of VXUP compared to its underlying index. [Source: YahooFinance ] The data above shows that VXUP significantly underperformed VIX during periods of increased volatility. For example, on June 8, the VIX spiked 7.6%, but VXUP was only able to manage a 0.8% gain, barely 1/10th of the VIX’s performance. On June 15th, the VIX rallied 11.7% with VXUP gaining 3.4%, better but still an awful underperformance. Thus, the fact that VIX and VXUP both finished the month with nearly equal 1% declines is merely a function of the VIX trading flat and is unrelated to effective tracking by VXUP. To illustrate, if instead of a month range, we use the period of May 21 to June 15, the VIX gained 27% while VXUP only climbed 0.6%. In the fund’s defense, between June 15th and June 22, the VIX fell 17% while VXUP only dropped 4%. Thus, VXUP is not necessarily underperforming the VIX, it simply appears to be less volatile than the VIX. Unfortunately, volatility is what makes the VIX ETFs so popular. To analyze VXUP’s performance further, Figure 5 below shows a scatterplot of VXUP daily performance vs VIX daily performance. (click to enlarge) Figure 5: Daily performance of VIX versus VXUP over the past month showing diminished volatility of VXUP as well as mediocre tracking compared to its underlying index. [Source: YahooFinance ] This data highlights two important points, neither of which is favorable for VXUP. First, note the shallow slope of the trend line in the figure. This approximates the beta of VXUP relative to the VIX. Beta is traditionally thought of as a measure of the volatility of a security or portfolio in comparison to the market as a whole. A stock with a beta of 1 indicates that a stock’s price movement will mimic that of the market – if the S&P 500 gains 5%, the stock will gain 5%; if the market is flat, the stock will be flat; and if the market falls 5%, the stock will fall 5%. A stock with a beta of 2 is more volatile than the market – a tech stock, for example – and will gain or lose twice that of the S&P 500 or whatever index is used as the benchmark. A beta of 0.5 is comparatively less volatile – a utilities stock, for example – and will gain or lose half of the market’s performance. Betas can also be calculated for one stock or ETF versus another stock or ETF. Let’s calculate the beta for VXUP relative to VIX. If the Beta is 1, this means that VXUP sees daily gains and losses comparable to that of the VIX. We already know what the result is going to be. Unfortunately, the beta for VXUP over the past month has been 0.21, meaning that the fund is only about 1/5th as volatile as the index it is trying to track. In other words, its creators successfully sought to eliminate decay and underperformance, but eliminated all-important volatility and opportunity for outsized gains that makes VIX products so popular investors. Second, Figure 5 also shows that VIX and VXUP don’t really correlate all that well as there is significant scattering around the trend line. The R^2 for the relationship is a lackluster 0.68 indicating a poor day-to-day tracking. In fact, VXUP isn’t all that much better than an ordinary Index ETF, both in terms of approximating the volatility of the VIX and effectively tracking its day-to-day movement. Let’s perform the same calculation as in Figure 5 using the SPDR S&P 500 ETF Trust (NYSEARCA: SPY ), the oldest and most popular index ETF, instead of VXUP. A scatterplot comparing daily movement of VIX versus SPY is shown below in Figure 6. (click to enlarge) Figure 6: Daily performance of VIX versus SPY over the past month showing comparable volatility of SPY and VXUP (shown in Figure 5). [Source: YahooFinance ] Note that SPY actually tracks the VIX more accurately on a daily basis than VXUP with an R^2 value of 0.79 vs 0.68 for VXUP, although of course the relationship between the two is inverse in that SPY goes down when the VIX goes up. The beta for SPY to the VIX is -0.08 compared to 0.21 for VXUP indicating similar levels of volatility. If one wanted to approximate VXUP’s volatility even more closely using an index ETF, a trader could go long the inverse leveraged Direxion Daily S&P 500 Bear 3x ETF (NYSEARCA: SPXS ) which has a beta of 0.23 and an R^2 of 0.80 relative to the VIX, beating VXUP on both fronts. What conclusions can be drawn from this data? On the one hand, VXUP and VXDN have, after 1 month, avoided the decay from rollover losses that plague Futures-based VIX ETFs like VXX. However, the ETFs have come up woefully short in tracking the day-to-day performance of the spot VIX and matching its volatility, which is what they were advertised to do. In fact, if a trader wants to be free of the rollover-induced decay seen in VXX and approximate the level of volatility seen in VXUP over the past month, he or she is better of shorting a simple index fund such as SPY or buying an inverse index ETF such as SPXS as these have better daily tracking than VXUP and comparable levels of volatility. To be compared to an index fund–intended to be a stable, non-volatile long-term investment for those actively trying to AVOID volatility seen in individual stocks–is a giant slap in the face for a volatility ETF. To put it more succinctly: I want volatility with my volatility ETF! Yes, the funds outperformed VXX, although this could be said of most index ETFs last month. Were the VIX to have spiked, VXX would have likely outperformed VXUP by a considerable margin. While I would like to give these funds the benefit of the doubt that perhaps they will more accurately track the VIX should it start trending directionally rather than the chop that we saw last month, I consider them to be failed funds right now. It is one thing for a fund like VXX to underperform its underlying commodity. Traders know why it does so and accept that underperformance as the cost of the opportunity for volatility exposure. VXUP/VXDN, on the other hand, are more than five-fold less volatile than expected, and it is not clear why. AccuShares had announced plans for similar paired funds for oil, natural gas, metals, and agricultural commodities, but I expect these ETFs will be tabled for now. Where does this leave us? To be honest, I believe trying to get long the VXX is a fool’s errand. Too much comes down to timing. VXX may track the VIX much better than VXUP–it has a beta of 0.41 with an R^2 of 0.89 relative to VIX–but it is suffers the rollover-induced drag discussed above. While the VIX will inevitably spike, waiting for it to do so long VXX can be very costly and not only holds your funds captive, but the eventual volatility spike might not even be enough to overcome rollover losses. The only situation in which I would consider going long VXX would be if the VIX were less than 12, more than 2 standard deviations below its long-term average. Over the last 25 years, when the VIX is less than 12, it rallies an average of 13% over the following month, rising 79% of the time, a high probability jump with a large enough magnitude that would likely outweigh any rollover-induced losses. With the VIX closing at 12.74 on Monday, we may actually be approaching this level. At the same time, I would be very reluctant to short VXX at these levels, even with a 6% monthly drag due to contango given the increased probability of a volatility spike. I prefer the higher probability play and would only consider shorting VXX if the VIX climbed above 20, which would limit further upside risk and allow profits both from rollover losses and any mean-reversion that takes place as volatility subsides. In the meantime, I believe that there are much better investments out there that do not come with the same risks as VXX or the limitations of VXUP. In conclusion, VXUP and VXDN were an admirable attempt by AccuShares to create a novel volatility product that was not dependent on VIX futures contracts and the disadvantages that come with these contracts. However, to date, it has failed to even come close to meeting its objective of tracking the spot VIX on a daily basis. The volatility of VXUP to date is so underwhelming that an investor would just as well use index funds to achieve the same level of volatility exposure. Therefore, I plan to avoid these ETFs barring a significant improvement in daily volatility. That being said, I am not enamored with the alternatives either. While VXX is roughly twice as volatile as VXUP, it’s rollover-induce losses drain a portfolio while waiting for a spike in voltility. Put another way, VXUP and VXDN remove some of the risk of volatility ETFs but take away most of the reward. VXX has more potential for reward, but introduces extra risk in the form of rollover losses. I would only recommend going long VXX when the VIX is at historical lows. Likewise, I would only take advantage of the rollover-induced losses and short the VXX when the VIX is elevated above its baseline average to reduce the risk of a spike in volatility that would devastate a short position. In the meantime, there are over 4000 actively traded stocks in the NYSE and Nasdaq. There are at least a couple that are better bets than trying to force the issue with volatility right now. 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.

Review Of 10 Themes Shaping Markets In 2015

Summary Semi-annually, I list my unfiltered investment themes and determine if I should tilt my asset allocation. This article is a review of my themes from the beginning of 2015 and a preview of my themes for the back half of the year. This process still leaves me with a muted tone for domestic assets and wary of increasing volatility. In early January, I wrote an article laying out my ” Ten Themes Shaping Markets in 2015 “. Stepping back from the day-to-day volatility of the market and writing down your own investment themes can be a valuable tool to framing your market expectations and setting your tactical asset allocation. As I began to write a semi-annual refresh of my market themes, I wanted to first revisit the market premises underpinning my positioning at the beginning of 2015. I hope that this retrospective look back at my beginning of year themes, and why my prognostications have or have not come to fruition, can be introspective to portfolio positioning for the remainder of the year. In bold, I have listed my beginning of year themes. Below these ten items, I discuss my view of how these themes have played out in the first half of 2015. 1. Deviating economic growth rates globally and attendant diverging paths of monetary policy will create new global imbalances, creating volatility and investment opportunity. In a global financial system that has become more linked over time, a failure for rates and currencies to converge in the short-run could lead to greater imbalances over longer time periods. As the U.S. mortgage crisis begat a global financial crisis which in turn exacerbated a European sovereign debt crisis, we have seen volatility cascade around the world. It is no wonder that the International Monetary Fund and World Bank have asked the Federal Reserve to forestall rate increases. The Fed, which has a dual mandate for maximum employment and stable prices in the United States , is being asked to be mindful of the global impact of its policies. This theme will be unchanged in my second half view, and could stay with financial markets for some time. 2. Financial market volatility has been at an unnatural trough. Sustained economic growth would lead to reduced monetary accommodation, precipitating volatility as interest rates climb. Conversely, weakened economic growth could lead to a sharp re-pricing of risky asset classes. In the first half, we saw weakened domestic economic growth and higher interest rates. While domestic economic growth contracted modestly in the first quarter, the market viewed the lull as driven by temporal factors like unseasonably cold weather and the sharp fall in oil prices on investment without a direct offset in higher consumption. Through the first half, we have managed to stay in this Goldilocks period of growth that is neither too fast to force the removal of Fed support nor too slow to lead to force a re-pricing of securities. Eventually the porridge will become too hot or too cold. 3. Global inflationary pressures remain quite subdued as witnessed in commodity prices, providing ballast for long interest rates. Disinflation risks remain in Europe and Japan. Falling domestic unemployment will continue to be slow to translate into wage growth in the United States given a generationally low labor force participation rate. While oil prices have rebounded since the beginning of the year (+9-11%), base metals have continued to move lower, a sign of sluggish global demand. Inflation readings in Europe and Japan, while positive, continue to be paltry at +0.3%. While the headline unemployment rate (5.5%) is approaching the estimated natural rate of unemployment, the labor force participation rate (62.9%) is still 3.5% below its peak in early 2007, equivalent to nearly 9 million of missing jobs. Inflation fears remain muted. 4. While the Federal Reserve is likely to raise the Federal Funds rate in the back half of 2015, the unwind of monetary accommodation will continue at a measured and data-dependent pace given little headroom for incremental support if the economy suffers an exogenous shock from foreign markets. The June FOMC statement was released last Wednesday, and the committee upgraded its assessment of economic activity, describing it as “having expanded moderately” versus having “slowed” in the April statement. Job growth was characterized by a “diminishing underutilization of labor market resources.” While the committee was more constructive on economic growth in its statement, the committee members view of the path of monetary policy as expressed through the oft discussed “dot plot” showed median expectations that flattened, with Fed Funds projections falling by 25bp on average for year-end 2016 and 2017 to 1.625% and 2.875% respectively. The qualitative discussion of an improvement in the economy and labor markets was met with quantitative depictions of a slower path of monetary policy normalization, signaling the Fed will remain data dependent on both the timing of the first interest rate hike and the pace of subsequent tightening. We are approaching the nine-year anniversary of the last Federal Reserve rate hike on June 29, 2006 when the Federal Reserve boosted its target Federal Funds rate 0.25% to 5.25%. In the lead up to the recent Federal Open Market Committee (FOMC) meeting, the market had begun to increasingly price in a September rate increase. Those odds have diminished somewhat as the market took the Fed’s commentary as generally bullish for rates. I continue to believe we will move off of the zero bound at the December meeting, and believe that the market’s attention should turn from the timing of the first rate increase to the pace of future rate increases, which I expect to continue to be slower than the current Fed expectations. 5. Stretched equity multiples domestically will necessitate that valuations be driven by changes in earnings, tempering further price gains. Speculative grade credit may offer better risk-adjusted returns than domestic equities. One of my principal takeaways from my January themes were that forward domestic assets returns were likely to be subdued. With my expectation for the central tendency of domestic equity returns to be in the high single digits, high yield bond returns, which I expected to be in the 6%-7% range after the oil-driven selloff in late 2014, looked good on a relative basis. While the strong equity market performance and recent fixed income sell-off have put domestic equity returns in front of the high yield bond market, the path has been smoother for junk bonds than domestic equities. Below is a graph comparing the year-to-date cumulative total return of the S&P 500 ETF (NYSEARCA: SPY ) versus the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ), demonstrating how this theme has played out in 2015. (click to enlarge) Sources: Bloomberg, Standard and Poor’s 6. Lagging returns for risky assets in Europe post-crisis and the likelihood of an increase in quantitative easing could lead to absolute outperformance relative to the U.S., but the variability of outcomes abroad is much wider. Given lower equity multiples and more accommodative monetary policy in Europe than the United States, higher return expectations abroad appear warranted. As the escalating Greek drama has highlighted, the European experiment has challenges unique to the United States. Europe has posted much higher equity returns thus far in 2015… (click to enlarge) Sources: Bloomberg, Standard and Poor’s …but when translated into U.S. dollars, the outperformance has been much less material. (click to enlarge) Sources: Bloomberg, Standard and Poor’s 7. This comparison extends to emerging markets, which could benefit most directly from rebounding economic growth, but remain exposed to global fund flows and the higher beta nature of their commodity-intensive economies. Emerging markets had outperformed for most of the year until the recent swoon. EM stocks have fallen by ten percent in just the last six weeks. (click to enlarge) Sources: Bloomberg, Standard and Poor’s 8. Within emerging markets, return dispersion will widen and could be defined by a given locale’s level of political unrest, fiscal or current account deficit, or exposure to commodities or a slowing China. A surprise uptick in global growth would make most markets winners, but there are many paths to another year of lackluster returns. We have seen historically strong returns from the Shenzen Composite Index (+93%), but negative returns in other Asian economies tied strongly to the Chinese economy. 9. Rising income and wealth inequality, excess global savings, and demography are combining to disrupt normal cyclical demand growth and increasing the risk of secular stagnation. Inequality will become a thematic constant that will inform global politics and policy. Like the first theme on global imbalances, socioeconomic imbalances are likely to remain a continued theme in financial markets and impact politics. 10. With stock prices near all-time highs and bond prices boosted by low interest rates, forward returns will be subnormal. As we head later into the business cycle, investors may wish to move towards a more defensive posturing, lower volatility investments, or look to lock-in cheap tail risk hedges. Domestic equity markets have squeezed out modestly positive returns in the first half, but the expectation for subnormal forward returns remains. While investors have unique time horizons, risk profiles, and risk tolerances, an honest discussion of their personal investment themes should be used to frame their tactical asset allocation. From this review of these first half themes, I expect to publish my themes for the second half in the near-term. I welcome feedback as I sharpen my themes for the second half of 2015. Author’s Disclosure My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long SPY. (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.

Comparing Healthcare Price Range Forecasts Of Market-Makers

Summary Holdings of healthcare ETFs provide widely varied focuses on aspects of this broad ranging, important industry’s activities. ETFs and their separate holdings all can be directly compared as wealth-building investment candidates. Price-change prospects are seen in the hedging actions of market-makers at work. Qualitative criteria: Odds for investor profit, size of price change payoff, credibility of forecast, likely extreme price drawdown exposure, and anticipated holding period requirements. All have prior experience histories. Meaningful risk/reward comparisons and other personal-preference qualitative investing considerations provide the investor with an array of appropriate choices of securities positions. Contained here are specific price sell targets, holding period time limits, and prior price-risk exposure experiences. These guidelines encourage investor-set boundary disciplines for portfolio management. Healthcare is an important, wide-ranging industry ETFs with healthcare-provider holdings have very different emphases. Knowing what is involved, and the emphasis contained, is essential to addressing investment objectives of completeness and diversity. Just as the energy industry has a wide array of participants with differing principal activities, so too does the healthcare field have its important essential specialties and integrators in supportive-competitive relationships with one another. Parallels between the two distinctly different economic sectors are suggestive. Energy wildcatters of the Exploration & Production dimension have their functions in healthcare among the Biotechnology developers. Oilfield services providers have some healthcare similarities in the roles played by healthcare insurance companies. Medical equipment producers and developers have their counterparts in the energy scene. Transportation and delivery of energy products are paralleled by healthcare services organizations. Significant similarity of role exists between integrated international oil companies and major pharmaceutical organizations. We will not attempt precise categorization in an industry where we have limited experience or familiarity. The point is that the diversity of activities in each field comes together at the point of making investment choices. Those choices may, and in our opinion should, be more influenced by the investor’s objectives and perspective, than by a morass of minute distinctions between participants in their related fields. In every case what counts for the investor is whether or not the subject of an investment choice will be seen to be an effective competitor, for the period of the investment holding. Effective not only among the direct competing participants in the field of concern, but also among the full range of competitors for the use of the investor’s capital. Where investing “rubber meets the road”, capital meets commitment. Critically, with investments, perspective and opinion play a dominant role. Why this information is different from the usual It is intended to be a current update for active investors who have an awareness of what kinds of RATES of return they need to build wealth deliberately for specific purposes that tend to have inflexible need dates. For investors aware that normal price fluctuation in good-quality equity investments during the course of a year regularly provides capital appreciation opportunities which are multiples of the trend growths of those same securities. While not intended principally for long term, buy-and-hold investors salting away capital for an indeterminate general purpose sometime in the indefinite future, it may well be of help for those who have arrived at a decision time for portfolio strengthening in the healthcare area. All investors are, or should be, aware of the need to make comparisons between alternatives in their quest for objective satisfactions. Our intent is to urge a focus on the kind of universal investing dimensions that make comparisons valid across a wide range of subjects. The matter of price is a pervasive issue in any type of investment decision. Active investors need to know that the market professionals who assist portfolio managers of billion-dollar investment funds in adjusting their holdings have a special insight into the likely market actions that are making prices move. Moreover, because the pros must put firm capital at risk temporarily to do their job, they make price-hedging transactions in derivative markets to protect themselves. What they will pay for that insurance, and the way the deals are structured, tell just how far it appears likely that prices may move, both up and down. Analysis of their behavior is performed systematically, daily, on over 3,000 equity securities, stocks, ETFs, and market indexes. As it has been since Y2K. Careful record-keeping provides an actuarial history of how well the market-making community can anticipate price changes, issue by issue, in coming weeks and months. Here we apply that analysis and its perspective to six of the Exchange Traded Funds, ETFs, that hold securities of healthcare corporations. Subjects of the study The ETFs of interest here are Health Care Select Sector SPDR ETF (NYSEARCA: XLV ), Vanguard Health Care ETF (NYSEARCA: VHT ), First Trust Health Care AlphaDEX ETF (NYSEARCA: FXH ), iShares U.S. Healthcare ETF (NYSEARCA: IYH ), iShares U.S. Healthcare Providers ETF (NYSEARCA: IHF ), and Direxion Daily Healthcare Bull 3x ETF (NYSEARCA: CURE ). Considerable differences exist between these 6 ETFs. One has been around since 1998 while another barely has a 4-year history. Another is structured in its makeup and holdings to cause its prices to have changes 3 times as large as the industry index. One is very concentrated in its holdings with ten names making up nearly two-thirds of its value. Another’s top ten holdings make up less than a quarter of its worth. The biggest ETF has investor commitments of over $14 billion; the smallest, less than a half-billion. One trades 9 million shares a day, another only does 90,000. Figure 1 provides the fundamentals: Figure 1 Most sell at P/Es just above 20, and at near 4x book value, save for IHF and less so, FXH. XLV and CURE are actively traded, with their entire capitalizations able to be turned over in 4-5 weeks. VHT and FXH both have considerably less liquid situations. What do they each hold? In Figure 2, the ten largest holdings of each are identified, with considerable duplication in a few names. XLV, VHT, and IYH have the most similar portfolios. FXH and IHF have a far more diverse set of stocks. Figure 2 UnitedHealth (NYSE: UNH ) and Actavis (NYSE: ACT ) are each in 4 of the ETFs. The largest average size holding is Johnson & Johnson (NYSE: JNJ ) with 3 ETFs each committing over 9% of their assets. But 14 stocks are held by only one ETF, out of the 25 issues so identified. The 3x leveraged ETF holds an undesignated mix of derivative securities to accomplish its special price characteristic in relation to the Health Care Select Sector Index. Some of the ETFs focus on big, established healthcare names like big-pharma producers, others like FXH and IYF look to more recent industry innovators. Comparing holdings’ prospects The investment prospects for each ETF should reflect the prospects for its major holdings, but that is not always so. Figure 3 shows how market-makers currently appraise the upside prospects for each of the larger ETF holdings in relation to the actual worst-case price drawdowns following prior forecasts like today’s. Figure 3 (used with permission) This picture plots ETF locations by coordinates of upside price change return forecasts on the lower horizontal scale, and by worst-case downside price change experiences following earlier forecasts like those of the present. The attractive green area contains issues with 5 times or more upside than downside prospects. The diagonal dotted line is the point at which price risk is expected to be equal to return. Issues higher than the diagonal have more risk than return, lower have better price change returns than risk exposure. Several issues share common locations. Comparing ETF risks and rewards Figure 4 provides the same comparisons for the Healthcare ETFs themselves, along with a market index norm in the form of SPDR S&P 500 Trust ETF (NYSEARCA: SPY ): Figure 4 The extreme compression of risk/reward tradeoffs pictured in Figure 4 indicates a market belief that despite high prices (limiting further upward price moves) in the foreseeable near future, these ETFs are market-correction resistant. But they are also viewed as under-performers relative to the market average SPY ETF at location [7]. Even CURE, with a 3x price leverage is seen to have an upside prospect of less than +5%, along with a downside history of some -5%. These valuations for the ETFs are significantly less optimistic than those held for their most important holdings in Figure 3, where upside prospects are all above +5%. None of their downsides have been, at worst, greater than their upsides, and many nowhere near as bad. To see what is driving the ETF situation, look at Figure 5. Figure 5 (click to enlarge) Here are the current MM forecasts for the healthcare ETFs, and the market outcome histories subsequent to similar forecasts. The mystery of compressed return forecasts from persistent high prices is at least partly explained in Figure 5’s columns 8 through 11. Four of the six have NEVER had a loss in their past 5-year histories following Range Indexes like today’s, and the other two are either 8 or 9 wins out of ten. Column 10 provides the real answer for the winning four, with holding periods ranging from only 9 to 17 market days. Even with their miniscule, below +5% gains, the annual rates of profit have been for the big winners multiples of 2x to 11x that of the market average. The other two candidates exceeded SPY’s annual rate of return by 500 to 700 basis points. Conclusion In a market environment highly expectant of a price correction, but one where that concern has been present for months, something that can produce very attractive rates of return one short holding period after another has real appeal for active investors. Here, there is an array of near-term investment candidates with high promise of reward at appealing rates, and prior experiences of fairly trivial price drawdowns during the brief holding periods needed to reach sell targets. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.