Seeking Alpha
, Blockdesk (1,459 clicks)
ETF investing, CFA, portfolio strategy, long/short equity
Profile| Send Message|
( followers)  

Summary

  • IBB employs diversification across stock issues in an economically strong activity sector as a double-barrel defense in the face of weak market concerns.
  • Many of IBB’s CAPM measurements generally regarded as negatives are clearly positives because the market is an inferior standard.
  • IBB’s Alpha, beta, and R-squared show it instead to have desirable properties in a declining market.
  • IBB’s top ten holdings, nearly 60% of Assets, serve widely-diversified medical problem growth markets, and its top 3 are only 8%+ each, the other 7 average 5%.

Why run fearfully and hide capital in "income" stocks?

Many investors currently are convinced that stocks are inevitably now headed for a correction. The conventionally-offered wisdom seems to be that somehow dividend yields will put a floor under stocks that pay out piddling periodic compensations.

Shouldn't you want your capital working for you, not trading 2% or even apparent 6% dividends for -10% to -20% ultimate net value losses, and two to three years or more of irretrievable time losses while trying to recover?

Here in iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) is an Exchange Traded Fund that simply does the best of what ETFs were originally created to do. It diversifies your investment into a solid collection of winning, proven businesses, each with competitive expertise in product/service markets where needs must be met either as a matter of life or death, or misery of physical comfort, or basic life capabilities. And it blends those strengths with measured, minimal investments in future growth, via breakthrough-development enterprises that might be high-risk single investment adventures.

IBB's 3 or 5-year MPT "Alphas" of +16% to +21%, grossly outclass the market-proxy ETF, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), charitably accorded an alpha of 0%. IBB's "beta" of .7 suggests market declines in SPY will be half again as bad as those in IBB.

And, oh my! IBB's "tracking error" deviates from the market due to an R-squared correlation of only .27 or .37, while that of a near-perfect SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) at .94 to .95 is certain to emulate almost the full plunge of a market crash, as it did in 2008-2009. Including so many of those sound dividend-payers.

IBB only managed a top-to-bottom decline of -34% while SPY enjoyed a full -52% terror. History shows the best market-decline defense is a market-performance offense.

The strength of IBB is clearly pictured in the pace of its market price progress, and that of several of its major holdings, in comparison with that of the S&P 500 (in the lower, light-yellow line):

(click to enlarge)

Maybe we all wish we had known 5 years ago that Regeneron Pharmaceuticals (NASDAQ:REGN) was going to be the big winner, but we probably didn't then. Still, having a piece of it, along with pieces of the other big winners, was a lot surer decision. Both then and now.

Compared to the better-than 50% loss in SPY, the just over 1/3rd decline in IBB during the 2008-2009 event was not only a lot easier to endure, but far quicker to recover from. IBB got back to its prior peak in only a bit more than a year and a half.

It took SPY 2 ¾ years longer to get back to even. Those are wealth-building years that can never be recovered.

Here is the income-defense delusion, as clearly as it may be pictured. PowerShares Financial Preferred ETF (NYSEARCA:PGF) currently pretends to offer a 6.1% yield. In a 2%+ base-risk environment, where is that kind of yield coming from? Take a look at the paths of the share values from 2007 to present to find out:

(click to enlarge)

That's right, this "income defense strategy" issue PGF, has paid its shareholders income right out of their own capital investment pocket ever since it started. Maybe it was a trick they learned from the mutual fund crowd.

On top of that, this issue provided more thrills and spills entertainment during the 2008-2009 horror show; just in case a -50% drop by the market average might not have been adequate. It managed a drop more like -75%.

Recover? We should expect recovery, after all those generous dividends? And even though the market crash hasn't come yet, it's still out there, again - possibly - sometime . (Sarcasm intended, in case it was not noticed.)

Not only has this income-defense issue cost its investors capital, it has cost them in PGF over seven of their precious wealth-building years. That could be a quarter of a retirement accumulation period or half of a college expense reserves accrual time. Spent that income-defense way, can it possibly be made up? We hate to think of the potential bad judgments that might be made now under the pressure of realizing how the time has been unwittingly squandered.

Conclusion

Keep your capital at work defending you, by selecting equity investments that outperform the crowd all the time, including when the crowd is in its "Woe is us!" mode. Or is anticipating an onset of that unproductive condition -- a period when serious emotional errors often get made.

The message here is that all investing involves risks of some sort. Best to find the ones that can really be afforded in your situation and do your best to make sensible choices, not the ones the herd marketers keep pumping out. Remember, time is precious. It gets invested, right along with the capital.

This is a better than usual time to invest in IBB and avoid the advices of the herd.

Source: iShares Nasdaq Biotechnology ETF: An Offensive Defense Buy In This Weak Market