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Summary

  • US Government involvement in expensive drug treatment pricing via Obamacare put down prices of not only stocks, but Healthcare Exchange Traded Funds as well.
  • Market-maker hedging actions produce, by intelligent behavior analysis, implied price range forecasts for involved ETFs.
  • Here is a tabular comparison of the projected values as a starting point for further due diligence analysis.
  • Average current forecasts for several hundred ETFs offers a norm of comparison for the Healthcare ETFs.

Last Thursday, US Congressman Henry Waxman (D-Ca), a long-standing critic of the medical profession, launched an attack on a specific company's treatment drug due to the expected cost of treatment - approaching $100,000 - for a specific ailment, with the avowed purpose of the government's refusal to pay via Obamacare - the "Affordable Care Act." The widely-publicized news took down prices not only of stocks, but related ETFs.

Here is a quick summary of the 11 most widely held and actively traded ETFs focused on healthcare issues, showing what the hedging actions of market-makers believe are price range limits that their big-money fund clients are likely to cause the securities to trade around.

(click to enlarge)

Following the forecast price ranges of the first two columns, the Monday closes thereafter in the Price Now column set the base for the upside price prospects to the Sell Targets at the high forecast in the next column.

To get a clear risk tradeoff for that upside return potential, we turn to a simple sell discipline that closes out a current buy position at the first instance of reaching the sell target, or a forced closeout at the end of 3 months when the target is not reached. We look to all prior forecasts that have a balance of upside-to-downside prospects like those now, and average the worst-case price drawdowns in each of them.

That upside-to-downside balance is measured by the Range Index, which tells what percentage of the forecast range lies below the Price Now. A count of how many times such a balance has occurred in the days of forecasts available in the past 5 years is the sample in the column that also counts the total number of days' forecasts that are available to be drawn from.

The Win Odds / 100 tells what percentage of the sample resulted in a gain from the sell discipline, while the % Payoff gives the average size of all positions, not just the wins. The average number of days each position had to be held contributes to the calculation of the Annual Rate of Returns. Its enormous size in the first row of the table points out how important it is to have a reasonable-sized sample to work from.

To emphasize that, we have put in boldface the five ETFs in the central rows that have adequate samples. They also have a subtotal row under the averages footers for all 11 ETFs in the table, to show how necessary it may be to avoid distorting items. For example, the viable sample size ETFs in over 300 prior experiences had gains in 91% of them, averaging 4% in 28-day holding periods - less than 6 weeks - for an annual rate of 42%. In contrast, the other 6 ETFs had only 11 similar previous forecasts, which in the aggregate, were an unprofitable set of experiences.

In particular, the SPDR Biotech ETF (NYSEARCA:XBI) and the First Trust Amex Biotechnology Index ETF (NYSEARCA:FBT) have attractive prior results from appraisals like today's. In contrast, the iShares U.S. Healthcare ETF (NYSEARCA:IYH) has had surprisingly unsatisfying performance.

For comparison of the Healthcare ETFs to their larger population, the table includes data on 335 ETFs for which we have implied forecasts. As in the Healthcare ETFs, when that larger set is trimmed down to those with reasonable samples, 230 ETFs provide a more representative current norm.

Comparing the viables from the healthcare set to the viable sample set of ETFs overall, the healthcare set's +42% annual rate overwhelmed the ETF population viables average of only +7%, while its typical worst-case drawdown was only -3.4%, compared to the population viables of -8.6%.

Conclusion

Selectivity among Healthcare ETFs at this point in time is important. While many of these ETFs have had exemplary longer-term performances, there are significant differences in how they are being perceived by market pros and big-money investors. It may be important to stay with the ETFs that have had strong past histories in disciplined circumstances. Each investor should make selections with care, not approaching the group with assumptions of strong surroundings lifting the entire group.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: IYH, IBB, XBI, Other Healthcare ETFs' Market Pro Price Forecasts, Following Congressman Waxman's Comments