The Range And Intensity Of ETF Focuses
There are over a dozen and a half Exchange Traded Funds [ETFs] aimed at healthcare activities. Readers and contributors at Seeking Alpha range in the intensities of interest of those listed in Figure 1.
The array of interest by Seeking Alpha [SA] participants is worth considering, when compared to the size of public investments for each. In the aggregate these ETFs have attracted $53 Billion of public investment capital, some 1/5th of the amount invested in the market index the SPDR S&P 500 ETF (SPY). Despite that concentration, only 11%-12% of the 366,000 SA participants concerned to be advised about SPY have similar attention desires at most for these ETFs.
The public’s variability of investment between the healthcare sector’s aggregate $53 billion ranges from $18 Billion in the Health Care Select Sector SPDR ETF (XLV) to $2.3 Billion in the iShares US Healthcare ETF (IYH). SA participants’ interest in that largest public investment of $18 billion numbers 23,000 while 44,000 SA’ers are interested where the public investment is only $2+ Billion. And 41,000+ of the SA audience are interested in the glamour (plus volatile thrills and spills) of Biotech developers as perhaps some place to move at-risk (?) big-pharma older investment capital.
Apparently, the SA widespread IYH interest is due to heavy prior interest in pharmaceutical stocks now seen as politically at risk, while the public attention has turned to the steadier services nature of care provision represented at XLV.
How the out-of-sync situation fostered by the widely-accepted conventional buy & hold strategy present at SA might be improved upon may depend on more promising share price change prospects of other healthcare ETFs. Those prospects are regularly evaluated by the market-making [MM] firms which help major investment organizations revise the asset relocations in their multibillion-dollar portfolios.
“Regular-way” market transactions cannot accommodate the size of the transactions needed to have an adequate effect, so negotiated “block trades” must be arranged, requiring the temporary availability of market-capital liquidity. It gets provided when protected against damaging stock price changes by hedging. That hedging process reveals the likely extent of coming price changes; forecasts which can be evaluated as to their reliability by the actual market outcomes subsequent to prior similar forecasts.
Reward~Risk Comparisons Among ETFs, Then And Now
Figure 2 offers a visual comparison of the Reward-to-Risk tradeoffs now seen among the ETFs of Figure 1 (on the left), versus how they looked two months ago, on the right.
(Note: All material from blockdesk.com has been approved for this article)
These forecasts come from the behavioral analysis of hedging actions by Market-Makers [MMs] as they protect their at-risk capital from possible damaging future price moves. Their potential reward (best upside likely price change) expectations are measured on the green horizontal scale. The risk dimension is of actual-experience price drawdowns of subject ETFs at their most extreme point while their positions to be hedged were held in previous pursuit of upside rewards.
Note how these healthcare ETFs – of diverse focuses – have become much more concentrated in the reward dimension (green, horizontally) in the past two months. Only the risk outliers (on the red vertical scale) of the 11/16/18 map on the right have shown much change – for the better.
Except for the Direxion Daily S&P Biotech Bull 3x Shares ETF (NYSEARCA:LABU). Its forecast continues to be realistically wild and woolly, appropriate for its holdings of leveraged, earlier-stage lab development Biotech stocks. Its evil-twin LABD has seen an improvement because its risk (of holdings being short) is constructed in its ownership contracts as having an inverse price relationship to conventional long ETFs. So the potential of LABD holdings price declines is being recognized.
Both scales are of percent change from zero to 25%. Any stock or ETF whose present risk exposure exceeds its reward prospect will be above the dotted diagonal line.
Best reward-to-risk tradeoffs are to be found on these maps in the green shaded area, down and to the right. In the case of two months ago, only SPY at location  had the upside potential of 5 (or more) times the worst prior price drawdown risk experienced. Now the SPDR Health Care Select ETF (XLV) at  in the current (left) map has that favorable balance of up-to-down prospects, but a smaller gain potential.
These maps are a good starting point, but they can only cover some of the qualitative investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. Those considerations include the odds of the Market-Makers' expectations being achieved or incurred and the lengths of time which may be involved in their pursuit. The table in Figure 3 covers those potentials and several others.
The Figure 3 table has two distinctive parts. The first 4 numeric data columns are products of the analysis of current behavior of market professionals. Those columns and the one headed Range Index report what that behavior implies about the current expectations of investment professionals for the likely range of ETF prices in the coming 3-4 months.
The remaining columns report what actual market price activity produced when prior forecasts for each stock similar to those of today were used to manage investments under a common portfolio discipline.
The Range Index column tells what percentage of each stock’s current forecast lies below the current market price. Under the Sample Size column heading a count of the number of prior forecasts with Range Indexes like today’s is indicated, along with the total number of all forecasts available from the past 5 years of market days.
Thinking about the credibility of the current forecasts, the proportion of those similar prior forecasts that could produce a capital gain profit becomes a significant measure. It demonstrates the capability of the forecasters to be helpful to the wealth-building investor. Its proportion as a percent of the prior forecasts sample is in the column headed Win Odds.
The Win Odds has an important impact on the Realized Payoff column next to it, where the NET gains of all the prior forecasts in the sample are reported. These results include the actual losses taken under our standard portfolio management discipline TERMD, which is applied to all forecast situations. TERMD sets the top of each implied price range forecast as a sell target for that single forecast. When first reached within the next 3 months’ closing market price that forecast position is closed so that the expanded capital can be immediately reinvested the following market day. If not reached in 3 months, the position is closed and reinvested, regardless of gain or loss.
The Risk~Reward Tradeoff map of Figure 1 presents upside forecast prospects to be pitted against actual prior worst-case downside price exposures during TERMD holding periods. The flavor of the prospective reward carrot, the column headed in the Figure 2 table as [E] %Upside Sell Target, was muted there by the worst-tasting next-column [F] experience headed Maximum Drawdown.
That point is viewed as the most likely high-stress point to cause an untimely termination of the adventure. A termination then would be at the least productive, most damaging point. Instead, committing the discipline’s full 3-month time investment (but not beyond) might achieve potential recovery to profitability, perhaps even to reach the forecast sell target. It can, and does happen.
Between the target “cup” and the %Payoff “lip” serious adjustments to commitment enthusiasms can (and usually may) occur. They are indicated by the [N] column headed Cred.Ratio where the Realized Payoff accomplishment [ I ] is contrasted with [E] the %Upside Sell Target offering.
The more critical Reward~Risk comparison draws on the Win Odds (and its complement) to condition the Realized Payoff and the Maximum Drawdown as indicated in the Odds-Weighted columns.
Figure 4’s rows provide all these important dimensions issue by issue for the more promising securities in Figure 1. They are accompanied by similar boldfaced measures of SPY to give a taste of “the market” as most frequently observed by the investing public.
At the bottom of the table simple averages of the listed stocks offer comparisons of the group with SPY and with a much broader population of some 2,700 stocks and ETFs as measured on this day. The population data often reveals overly optimistic sell targets and abysmal payoff results. In contrast, the population’s “top10” issues, ranked by their odds-weighted prior forecast histories, typically present annual rates of capital accumulation in the +75% to +90% range and even above, like today’s 107%.
The wealth-building score is measured by a portfolio’s compound annual growth rate, or CAGR. Each holding in the portfolio contributes its part, given the emphasis of capital commitment dedicated to it. Here each of the group’s available candidates is viewed as having an equal participation prospect on an all or none basis at this point in time and opportunity.
But CAGR is the meaningful standard. It makes the “speed” of wealth accumulation critical because the efficient use of time provides a non-financial leverage in attaining the portfolio’s goals. Recognizing that time presents a powerful (pun intended) function in the CAGR equation’s calculation, an understanding of each investment candidate’s time investment is important. In the financial community the “speed” of reward is measured in units of “basis points per day.” A basis point is 1/100th of one percent.
Under the portfolio management discipline of TERMD the holding periods of capital commitment to various positions may be quite uneven. This is in contrast to the usual methods of measurement for portfolio performance, looking at all holdings during equal calendar periods. That style of measurement tends to encourage buy & hold investing strategies which result in grossly inefficient capital utilization when the significant leverage of time is considered.
This kind of passive investment management behavior is a hangover of 20th century investing economics when making holdings changes was quite expensive. At that time serious opportunity for positive reward increments was required to justify the cost of making holdings changes. Payback periods for changes, measured in multiple months to years, could often be encountered.
Advances in transaction technologies now present paybacks of days to hours, with trends spurred by incentives among competing brokerage service providers.
Investment selection criteria (before the act) should be different from performance measurement (after the fact). When measuring the attractiveness of investment candidates in a wealth-building mission environment it makes sense to rank them by their demonstrated rates of capital accumulation. Figure 3 does that in their bp/day order, the last column on the right.
The ranking tends to favor stocks with recent favorable experience and degrade those with extended unfavorable market history. The potential for demonstration of significant change in trend may encourage some overstaying positions or new investment choices with an investment losing its market-competitive edge. But it also impedes a too-eager repetition of falling-knife experiences where ultimate recovery may be reasonably expected.
Visual Comparison Of ETF Odds And Payoffs
Figure 4 provides a mapping of prospects for each ETF’s historical payoffs, in coordination with its odds for providing a profitable investing experience. The picture’s orientation is like that of Figure 2, where good is down and to the right. Not-so is up and to the left. Items in the white Payoffs area at left have achieved average Win Odds amounts less than 80 out of 100, and those in the extreme upper left corner also have had negative % payoffs from prior forecasts at current RI-levels. As in Figure 2, we have positioned the two-months-ago outputs on the right, with the current ones on the left.
For market-reference we include the S&P 500 Index ETF (SPY) at  on the right to provide a sense of market aggregate opportunity and achievement, and at location  on the left. Now the strongest bp/day competitor-candidates for investment of ProShares UltraPro NASDAQ Biotechnology ETF (NASDAQ:UBIO) at , LABU at , XLV at  and IYH at  form the frontier of opportunity in the current, left-hand map. Those investors with desire for reassurance of gain (Win Odds) over its speed and size of achievement may favor XLV over UBIO and LABU.
Recent Forecast Trends For Best ETFs
Figures 5 and 6 provide a weekly sample of near-term price range forecast histories during the past two years for UBIO and the iShares U.S. Financials ETF (NYSEARCA:IYF) along with their current qualitative considerations for your appraisal.
The vertical lines here are ranges of likely coming prices expected near term, at the date of the forecast. The dates are once-a-week (Thursdays) extractions of forecasts determined every market day. They cover the most recent two-year period.
We look to prior forecasts which have the same upside to downside proportions as are seen today for indications of what prices are likely to be coming near term. A sample small enough to be influenced by only a few extreme forecasts could be misleading. That likely won't be a problem with 53 forecasts to be averaged, but perhaps with only, say a dozen, it could.
The small blue picture at the bottom of Figure 3 shows the frequency of forecast Range Indexes for UBIO. The odds for reaching profitable prices should, under normal circumstances, be related to forecast proportions. In the case of UBIO here, its Win Odds of 75 out of 100 are reassuring to a wealth-building objective. Those odds are the average experience of these 53 prior forecast experiences.
Comparing Win Odds among potential investment alternative competitor securities is a common task set by careful skilled investors. Other dimensions subject to examination this way are the size of the sample's average net % price gain payoffs (+7.7% for UBIO) and the extent of price drawdowns (-16.3%) in pursuit of the payoff potentials.
These considerations all are qualitative factors in selecting equity investments, and individual investors may favor each of them in different degrees. "Sauce for one goose" may not be preferable for another "gander". That is what provides liquidity in securities markets. But when markets favor one qualitative factor unduly over another, price extremes occur.
IYH’s past two years have been a less volatile experience than UBIO’s, offering smaller opportunities for near-term capital gains. Its forecast at present offers only half that of UBIO in column [E] of Figure 2 and its realized gains of +4.7% have provided CAGRs of less than half of UBIO. But IYF experienced typical price drawdowns of less than -2% following prior forecasts like those of today. The cost of that comfort has been substantial for an investor under time pressure to reach a wealth-accumulation goal.
Forecasts like today's have occurred only 19 times in the past 5 years, or approximately once a calendar quarter. UBIO’s current forecast has been present about the equivalent of once a month.
For an investor actively working capital to meet a financial objective under time pressure, the ProShares UltraPro Nasdaq Biotechnology ETF (UBIO) presents an attractive opportunity now in comparison to several other Healthcare ETFs.
Disclaimer: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.
We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided in the SA blog of my name. The year 2018 provided net CAGR gains on over 4800 issues of +25%. First half of January has produced over a hundred profitable position closeouts.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in UBIO over 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.