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4 Top-Ranked Healthcare Mutual Funds To Boost Your Return

When markets are plying through choppy waters, investors often rely on the healthcare sector to safeguard their investments. This is because the demand for healthcare services does not vary so much with market conditions, making them a safe haven in difficult times. Many pharma companies also generate regular dividends, which go a long way in softening the blow dealt by plummeting share prices. Mutual funds are the perfect choice for investors looking to enter this sector, since they possess the advantages of wide diversification and analytical insight. Below, we share with you 4 top-rated healthcare mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy), and we expect each fund to outperform its peers in the future. To view the Zacks Rank and past performance of all healthcare mutual funds, click here . Fidelity Select Pharmaceuticals Portfolio No Load (MUTF: FPHAX ) seeks growth of capital. The fund invests a lion’s share of its assets in securities of companies involved in operations, including manufacturing, distribution and development of pharmaceuticals and drugs. It generally focuses on acquiring common stocks of companies located throughout the globe. Factors including economic condition and financial strength are taken into consideration before investing in securities of a company. The Fidelity Select Pharmaceuticals Portfolio No Load is a non-diversified fund and has a three-year annualized return of 22.9%. Asher Anolic has been the fund manager of FPHAX since 2013. T. Rowe Price Health Sciences Fund No Load (MUTF: PRHSX ) invests a major portion of its assets in common stocks of companies whose primary operations are related to health sciences. It focuses on investing in large and mid-cap firms. The T. Rowe Price Health Sciences Fund No Load has a three-year annualized return of 30%. As of September 2015, PRHSX held 160 issues, with 4.97% of its assets invested in Allergan plc (NYSE: AGN ). Vanguard Health Care Fund Investor (MUTF: VGHCX ) seeks long-term capital growth. The fund invests a large chunk of its assets in securities of companies primarily involved in operations related to the healthcare domain. VGHCX invests in healthcare companies, including pharmaceutical firms, medical supply companies and companies engaged in operations related to medical and biochemical. It may invest a maximum of half of its assets in companies located in foreign lands. The Vanguard Health Care Fund Investor has a three-year annualized return of 26.8%. VGHCX has an expense ratio of 0.34%, as compared to the category average of 1.33%. Fidelity Select Medical Delivery Portfolio No Load (MUTF: FSHCX ) invests the majority of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. It focuses on acquiring common stocks of issuers all over the world. The Fidelity Select Medical Delivery Portfolio No Load fund has a three-year annualized return of 20.8%. As of October 2015, the fund held 47 issues, with 19.06% of its assets invested in UnitedHealth Group Inc (NYSE: UNH ). Original Post

ETF Tactics For A Rate-Proof Portfolio

With back-to-back months of solid jobs growth and moderate inflation, the era of tightened policy might kick in as early as in two weeks, as the chance of the first rate hike in almost a decade now looks more real. The Fed is slated to increase interest rates at its upcoming December 15-16 policy meeting, but at a gradual pace. The initial phase of increase will actually be good for stocks as it will reflect an improving economy and a lower risk of deflation. Plus, higher rates would attract more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. However, since a strong dollar should have a huge impact on commodity-linked investments, a rising rate environment will also hurt a number of segments. In particular, high-dividend-paying sectors such as utilities and real estate would be the worst hit given their higher sensitivity to rising interest rates. Further, securities in capital-intensive sectors like telecom would also be impacted by higher rates. In such a backdrop, investors should be well prepared to protect themselves from higher rates. Here are number of ways to create a rate-proof portfolio that could prove extremely beneficial for ETF investors in a rising rate environment: Bet On Rate-Friendly Sectors A rising rate environment is highly beneficial for cyclical sectors like financial, technology, industrials, and consumer discretionary. Investors seeking protection against rising rates could load up stocks in these sectors through diversified or niche ETFs. Some of the broad ETFs having double-digit exposure to these four sectors are the iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA: ITOT ), the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ), and the iShares Russell 3000 ETF (NYSEARCA: IWV ). Other sectors make up for a smaller part of the portfolio of these funds. Investors seeking a concentrated exposure to the particular sector could find the iShares U.S. Financial Services ETF (NYSEARCA: IYG ), the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), the First Trust Industrials AlphaDEX ETF (NYSEARCA: FXR ) and the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA: XLY ) intriguing. All these funds have a Zacks ETF Rank of 2 or “Buy” rating, suggesting their outperformance in the coming months. Focus On Ex-Rate Sensitive ETF The timing of interest rates hike is resulting in higher market volatility. For protection against both, the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) could be an ideal bet. This fund provides exposure to 100 stocks of the S&P 500 that have both low volatility and low interest rate risk. This approach looks to exclude the stocks that tend to underperform in a rising interest rate environment, and is tilted toward financials (28.1%), industrials (21.5%) and consumer staples (15.2%). As such, XRLV is a compelling choice to play the rising rate trend. Follow Niche Bond ETF Strategies Though the fixed income world will be the worst hit by rising rates, a number of ETFs like the iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) and the iPath U.S. Treasury Steepener ETN (NASDAQ: STPP ) that employ some niche strategies could see huge gains. This is because a floating-rate note ETF pays variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. On the other hand, the Steepener ETN directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in the U.S. Treasury note futures contracts. Shorten Bond Duration Higher rates have been cruel to bond investors, especially the longer-term ones, as an increase in rates has always led to rising yields and lower bond prices. This is because price and yields are inversely related to each other and might lead to huge losses for investors who do not hold bonds until maturity. As a result, short-duration bonds are less vulnerable and a better hedge to rising rates. While there are several options in this space, the SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ), the iShares Ultrashort Duration Bond ETF (BATS: NEAR ) and the Guggenheim Enhanced Short Duration ETF (NYSEARCA: GSY ) with durations of 0.16, 0.36 and 0.17 years, respectively, seem intriguing choices. Original post

Backtesting Smarter Beta: Do We Have A Winner?

Summary The smarter-beta strategy uses three smart-beta ETFs as sources for an investable portfolio that provides exposure to three risk-premia factors. The factors are low volatility, momentum and quality. In this article I report on a backtest of the strategy using data from the inception of the youngest of the three ETFs. I started an exercise to mine three of iShares smart-beta ETFs for investment ideas. My idea was to use the portfolios of the funds, which are designed to provide broad exposure to one of the risk-premia factors, as a source for devising and investable portfolio that provides exposure to all three factors. The three ETFs I selected are: iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) iShares MSCI USA Momentum Factor ETF (NYSEARCA: MTUM ) iShares MSCI USA Quality Factor ETF (NYSEARCA: QUAL ) These are, as the names tell us, focused on low-volatility, momentum and quality factors. I refer you to my first article on the topic where I describe the methods and concepts in detail ( A Quest For The Smartest Beta ). Briefly, I compare the portfolios of the funds and select the equity positions that are held by all three. This is illustrated in the Venn Diagram to the right. I combine the stocks that overlap the portfolio holdings of all three funds in an equal-weighted portfolio. Readers have pointed out that I’m neglecting at least two important factors, value and size, which are also cards in the iShares ETF smart-beta deck. I looked into this ( Expanding The Smart Beta Filter: Does It Help? ) and concluded they offered no advantage over the three I selected. This was based on a very limited data set as I’ll describe, however. With access to earlier cycles for the funds’ portfolios it may be worth the effort to revisit this question as well. One feature of these funds is that their indexes are rebalanced twice annually, on the last business days of May and November. Until today, I was unable to do any sort of backtest. So, when I first introduced the concept in November I used the portfolio that was put into effect in June 2015 and looked at returns over the five-month period. At the end of November, I published a rebalanced portfolio ( Momentum, Quality and Low Volatility: Continuing the Quest for Smarter Beta ) and results for the full six-months of the ETFs’ rebalancing cycle. Those results were highly encouraging. Each time I wrote on the topic, I lamented not having access to historical portfolios for the funds to further explore performance. Then a sharp-eyed reader added a comment pointing out where those data were available (thanks again, ipaul66 ). So, I’ve downloaded holdings data going back to end-of-November rebalance for the inception of QUAL, the youngest of the three funds, in August 2013. I’ve also shown that the three funds together in an equal-weighted portfolio turned in a solid performance record vs. the broader market represented by the S&P 500 TR index (^SPXTR). I’ve included that portfolio in this analysis as a comparison. The backtest covers two years, still woefully short, but a huge improvement on six months. There are four six-month cycles with complete results. The most recent cycle began on the last day of November, so we have nothing meaningful from that as yet. CAGR Let’s start with the big result: CAGRs for each of the strategies. This table shows CAGRs for each six-month cycle for the smarter-beta portfolio (MQLV), the S&P 500 TR index, and the equal-weighted ETFs (3ETFsEqWt). Both the MQLV and the three ETFs beat the S&P 500. Only for the Dec 2013 through May 2014 cycle does the broader market outperform. Commutative and Cycle Returns The next chart shows cumulative return on $100,000 invested in the three strategies on December 1, 2013 through the November 29, 2015. (click to enlarge) And, for $100,000 invested at the beginning of each semi-annual rebalancing cycle: (click to enlarge) Conclusions and Caveats These results do support and validate the earlier finding. The smarter-beta strategy appears to be an effective filter that can add meaningful alpha relative to the broader market, or to equal-weighting the three source ETFs. I caution, however, that this is based on only two years’ history, and for a quarter of that period the smarter-beta strategy sharply under performed. The model is equal-weighted which may not be optimal and weighting needs a closer look. Having this two-year data set will give me the opportunity to explore other weighting strategies. This analysis makes no allowance for trading costs. One can often buy an S&P 500 index fund in a commission-free ETF. The three-ETF portfolio requires at most twice-yearly rebalancings for modest cost. The MQLV portfolios comprised 12 to 19 positions over the two years, so trading costs are significant, especially for smaller portfolios. If I introduce a 0.25% slippage factor (which allows for trading costs but not spread costs) the CAGR falls to 15.46% for a $100,000 portfolio, still beating the S&P 500 handily, but it does illustrate the cost of turnover. For a smaller portfolio, a larger slippage factor is required. For a $10K initial investment, 32 annual trades at $8/trade would be 2.56% and that much friction drops the CAGR to $10.17%. Even assuming the best interpretation of these results, the strategy generates substantial turnover and is only suitable for reasonably large portfolios (or for those who have accounts that provide free trades). I mention this because I have had commenters suggest they might try the strategy with only a small number of shares for each position. For the investor who is not interested in the turnover and trading this strategy will require, the equal-weighted portfolio of the three ETFs is an attractive alternative. That strategy did not turn in a single negative cycle, more than can be said for either the smart-beta portfolio or the S&P 500. Trading costs are modest with a maximum of 12 trades a year for the semi-annual rebalance, but even that may not be necessary as the ETFs do not vary much from on another over the course of a year or two. Comparing the two-year CAGR of 11.68% to 9.58% for the broad market would seem to indicate that the strategies being used in the MSCI indexes do in fact capture alpha from exposure to the risk-premia factors.