top 3 index funds for biotech
TRANSCRIPT
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Top 3 Index Funds for Biotech
Performance Review of
IBB, PJP and XBI
A Market Brief
!
Steven Kim
"int#it Investin$www%mint&it%com
Disclaimer This rief is provided as a resource for information and education%The contents ref'ect persona' views and shou'd not e construed asrecommendations to an! investor in particu'ar% (ach investor has to conductdue di'i$ence and desi$n an a$enda tai'ored to individua' circumstances%
) *+ - "int#it%com
http://www.mintkit.com/http://www.mintkit.com/ -
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.ummar!
A performance review of the top index funds for the iotech industr! paves the wa! for
investin$ in one of the most d!namic ranches of the stoc& mar&et% For this purpose, a
ro ust and convenient vehic'e for investment 'ies in an exchange traded fund /(TF0%
In order to o tain a a'anced view of performance, the window of eva'uation shou'd cover
a period in which the mar&et has encountered a oom as we'' as a ust% 1n one hand, a
'on$ish span provides a wea'th of data for a thorou$h surve! of performance% 1n the other
hand, the turnout in recent !ears is 'i&e'! to e a etter $uide to the prospects $oin$
forward than the experience of the distant past% 2iven this ac&drop, a window of three
!ears seems 'i&e a fittin$ compromise etween the contrastin$ issues of amp'e data
versus hi$h re'evance%
From a different an$'e, a $raphic disp'a! of the price histor! can provide an intuitive $rasp
of the index funds under consideration% The earnest investor has to consider the vo'ati'it!
of the vehic'es durin$ the window of eva'uation in tandem with the overa'' pa!off over the
entire stretch%
Based on the capita' $ains over the course of three !ears, the est index funds in the
iotech patch $o ! the tic&er s!m o's of IBB, PJP and XBI% (ach of these vehic'es
trounced the chief enchmar& of the stoc& mar&et name'!, .P4 ! a hu$e mar$in%
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Keywords:
Biotech, (TF, (xchan$e Traded Funds, Index, Top, Best, Index, Performance, Ris&,
Return, .P4, IBB, PJP, XBI
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To o tain a rounded view of performance, an investment vehic'e has to e assessed over
a 'on$ish period that inc'udes at 'east one upsur$e and one 'owup of the mar&et% For this
purpose, a suita 'e window 'ies in an interva' of three !ears endin$ in Fe ruar! *+ -% This
timespan covers the crash of the stoc& mar&et in the autumn of *+ as we'' as the
upswe''s of the ourse efore and after the ustup%
In order to pic& the est index fund for a 6est! portfo'io, a asic step is to pinpoint the front7runners in the fie'd% In si6in$ up the candidates, the &e! criteria inc'ude the return on
investment a'on$ with the vo'ati'it! in price%
As a ru'e, the fore$oin$ traits are inter'in&ed rather than independent% For instance, an
index fund on a $rowth strea& is apt to e more f'i$ht! than a p'oddin$ ri$ that tramps
a'on$ at a 'um erin$ pace%
In sortin$ out the intertwined traits, a strai$htforward move is to e$in ! cu''in$ the
'eadin$ vehic'es in terms of $rowth% Then the other factors such as ris& and 'i8uidit! can e
rou$ht to ear on the appraisa'%
Selection Criteria
.ince the purpose of an investment is to earn a profit, a candidate assets ou$ht to efruitfu' as we'' as hard!% These $eneric traits app'! to tan$i 'e $oods as we'' as virtua'
wares% An examp'e of the former 'ies in commodities or rea' estate, whi'e an instance of
the 'atter invo'ves currencies or index funds%
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.ince the eve of the mi''ennium, the fie'd of exchan$e traded funds has $rown at an
exp'osive rate% A'on$ with the upthrow, a raft of entrants have popped up on'! within the
past few !ears% For this reason, the newcomers have 'itt'e to offer ! wa! of trac& records%
1n one hand, a 'ar$e trove of data can serve as the fodder for a comprehensive surve! ofthe mar&et% 1n the other hand, an investor who insists on an extensive histor! wi'' there !
exc'ude scores of f'ed$'in$ funds%
2iven this ac&$round, the mindfu' p'a!er has to trade off the amount of data a$ainst the
num er of candidates% In that case, a trac& record of 3 !ears appears to e a suita 'e
compromise etween the opposin$ factors%
In pic&in$ the est vehic'es for investment, a second criterion invo'ves the 'i8uidit! of the
mar&et% A s'u$$ish niche mar&ed ! 'ow turnover is a turnoff for the nim 'e investor who
wants to enter and exit the mar&et in a time'! fashion% As a defensive measure, a turnover
of +,+++ shares a da! seems 'i&e an apt thresho'd on the 'ow side%
A third factor 'ies in the use of 'evera$e, or 'ac& of such% 1n a positive note, a 'evered
scheme can turn in an outsi6e $ain when the mar&et is on a ro''% 1n the f'ip side, thou$h, a
hi$h 'eve' of $earin$ resu'ts in a crushin$ 'oss durin$ the downstro&e that du'! fo''ows
ever! upsur$e%
As a practica' matter, the upta&e of 'evera$e opens up a can of worms which is anathema
to the $enuine investor ent on ui'din$ up a nest e$$ over the 'on$ hau'% The o$e!s at
hand inc'ude o vious threats as we'' as o scure sna$s%
To e$in with, a stumper of modest si6e concerns the standard notion of ris&% The use of
'evera$e $ives rise to wi'd swin$s to the upside as we'' as downside% The thrashin$ of
prices shows up in a'' time frames, from 'ess than a wee& to more than a decade% The
manic f'ai'in$ due to a 'evered position is a headache that the so er investor does not
need to put up with%
From a 'ar$er stance, thou$h, the vo'ati'it! in price is a minor nuisance compared to the
$ross specter of a whoppin$ f'op% 9nfortunate'!, the prospect of utter ruin is i$nored ! the
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mass of participants in the mar&etp'ace% The cava'ier p'a!ers who rush aside the 'etha'
threat run the $amut from casua' amateurs to $un$7ho professiona's%
To add to their p'i$ht, the victims of a 'owup rare'! mana$e to reco$ni6e the true cause of
the mishap even after the fact% In most cases, the stunned sou's wa'& around in a da6eand cha'& up the ust to a wanton act of providence% In rea'it!, thou$h, such a &noc&out is
the inevita 'e outcome of a rec&'ess wa$er%
In this wa!, the upta&e of 'evera$e is a rash move that ends in tears sooner or 'ater% In
some cases, the $earin$ resu'ts in the cutdown of wea'th in s'ow motion% A $ood examp'e
invo'ves a communa' fund in which the operators purchase a series of stoc& options in a
f'a&! effort to ma$nif! the impact of a rise in price in the tar$et mar&et%
In practice, thou$h, the u'& of options expire without !ie'din$ an! &ind of pa!out to the
u!ers% "ore $enera''!, the purchase of tur ochar$ed too's is a 'osin$ $ame over the 'on$
hau' for mi''ions of punters%
The $rod! outcome is a universa' fate that efa''s a'' manner of p'a!ers in the mar&etp'ace%
A common examp'e invo'ves the purchase of ca'' options in order to :ac& up the returns on
a stoc& index% .ad'!, thou$h, the p'un$ers in search of 8uic& profits are headed for the
poorhouse sooner or 'ater%
;ependin$ on the context, the operator of a communa' fund ma! opt to ta&e up 'evera$e in
other wa!s% An examp'e 'ies in a customi6ed 'oan from a commercia' an&, or a
standardi6ed contract in the futures mar&et% 1n the downside, thou$h, the 'evered $am it
is sure to rin$ $o s of $rief in due course%
The threat of a tota' wipeout is far $reater than most peop'e rec&on% To revea' the scope of
the pro 'em, we turn to the financia' crisis of *++< a'on$ with its aftershoc&% In the throes
of the ca'amit!, ever! ma:or enchmar& of the stoc& mar&et 'ost more than ha'f the va'ue it
had reached at its prior pea&%
In that case, a modicum of 'evera$e ! a mere factor of * resu'ted in the o 'iteration of the
entire principa' from the outset, and then some% In certain fie'ds such as the futures
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mar&et, a ramp7up ! a factor of + is par for the course% "eanwhi'e other domains such
as currenc! tradin$ a''ow the $am 'ers to ta&e up 'evera$e ! a factor of =+, or in some
cases ++ or even hi$her% As we have seen, however, even a modest amount of $earin$ is
the path to certain doom%
From a 'ar$er stance, a $'ut of ris& is the main cause of the end'ess hai' of 'owups in the
financia' forum% A fine examp'e invo'ves the swarm of hed$e funds that f'it around the
mar&etp'ace% In this portion of the mar&et, even the e'ite outfits name'!, the 'uc&! punters
that have mana$ed to s8uirm their wa! into the top tier of heav!wei$hts are fated to 'ow
up and die off in droves% "ore precise'!, the $hast'! rate of attrition thins out the ran&s of
the hi$h f'!ers at the :aw7droppin$ rate of one7ha'f of their num er ever! coup'e of !ears
/#im, *+ 0%
2iven the ha6ards oth 'atant and su t'e, ta&in$ up 'evera$e is an assured wa! to 'ose
out over the 'on$ ran$e% For this reason, we wi'' exc'ude an! vehic'e that resorts to $earin$
in a rec&'ess attempt to pump up the returns on investment% In other words, the proper
candidates for a sound pro$ram of investment re'! on the honest tac& of trac&in$ the tar$et
mar&et in a forthri$ht wa! without u'&in$ up on the steroids of 'evera$e%
Top Index Funds for Biotech
In the wor'd of communa' funds, a venera 'e resource is found in an information provider
named "ornin$star% At the >e site maintained ! the mar&et watcher, one feature is a
asic 'ist of exchan$e traded funds% The data on the poo's inc'udes a ta''! of performance
over the past 3 !ears as we'' as a measure of popu'arit! in terms of the vo'ume of tradin$%
As we noted ear'ier, a candidate asset ou$ht to feature a modicum of 'i8uidit! in order to
ena 'e the investor to u! and se'' a sta&e in a time'! fashion% For this reason, we wi''
consider on'! funds that sport a tradin$ vo'ume of +,+++ shares a da! as a representative
fi$ure%
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To rin$ up an additiona' fi'ter, an (TF ou$ht to oast a modicum of price histor! in order
to support a meanin$fu' ana'!sis of performance% For this purpose, a window of 3 !ears
seems 'i&e a fittin$ re8uirement%
A standard earer of the stoc& mar&et 'ies in an index of =++ heav!wei$hts compi'ed ! afinancia' advisor! named .tandard @ Poor s orporation, an outfit which a'so $oes ! the
nic&name of S&P % The enchmar& of the i$ fish happens to e the most popu'ar prox! of
the stoc& mar&et amon$st the professiona's in the fie'd, e the! active traders or passive
researchers% "eanwhi'e he trac&in$ fund for the mar&et index trades under the tic&er
s!m o' of SPY %
Accordin$ to a recent ta''!, .P4 turned in an avera$e return of -%*+C per annum over thecourse of 3 !ears endin$ in ear'! *+ -% In terms of transaction vo'ume, the index fund is
prone to cha'& up rou$h'! * mi''ion shares a da!%
1ur tar$et domain consists of iotech funds that shun an! form of 'evera$e% Amon$ these
poo's, the top performance was turned in ! the i.hares Dasda8 Biotechno'o$! fund,
which trades in the 9%.% mar&et under the tic&er s!m o' of IBB% The purpose of the vehic'e
is to trac& an index focused on iotechno'o$! and pharmaceutica' firms 'isted on the
DA.;AE exchan$e% The trac&in$ fund a$$ed a $ain of - %+
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Graphic View of erformance
As we noted ear'ier, a window of three !ears endin$ in ear'! *+ - covers an upsur$e of
the stoc& mar&et in the wa&e of the 2reat Recession as we'' as a crash of the ourse in
the autumn of *+ % 1n the other hand, a 'on$er window of five !ears offers a roader
view of the mar&et%
In this wa!, a surve! of the vehic'es durin$ and after the 'atest crash can provide a raft of
pointers for the deft investor% The chart e'ow, courtes! of ".D "one! /mone!%msn%com0,
spans a period of = !ears endin$ in Fe ruar! *+ -%
In order to mar& out a ase'ine, the 'ue curve in the exhi it renders the course of .P4
over the span of ha'f a decade% The sharp drop around the midd'e of the chart portra!s the
crash of the stoc& mar&et in the autumn of *+ %
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;espite the inevita 'e set ac&s from time to time, the 'eadin$ enchmar& of the mar&et
had a ha it of trud$in$ hi$her over time% The oxed num er on the ri$ht side of the $raphic
indicates that .P4 rose ! +%3+C over the entire span of five !ears%
"eanwhi'e, the $o'den curve on the chart depicts the pro$ress of XBI% The index fund wasprone to trai' ehind its riva's durin$ the first few !ears of the appraisa' window% 1n the
other hand, the 'ate 'oomer shoo& off the do'drums in *+ * and sna$$ed a $ain of
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As a resu't, the sap'in$s of this reed do not have much of a trac& record% In that case, an
investor who insists on a 'en$th! histor! wi'' end up with a scant! poo' of candidates%
For this reason, the wor'd'! investor has to trade off the 'en$th of the trac& record a$ainst
the si6e of the candidate poo'% At this ear'! sta$e in the evo'ution of exchan$e tradedfunds, a reasona 'e compromise etween the opposin$ factors is a minima' 'ife span of 3
!ears%
From a different stance, a $raphic disp'a! of the price action can provide an intuitive fee'
for the texture of the mar&et% A showcase 'a! in the head! sur$e of the ourse after the
financia' crisis of *++< and its fa''out%
"oreover a concurrent disp'a! of the assets under review can hi$h'i$ht an! diver$ence in
performance% For the case stud! at hand, the difference in ehavior is spot'i$hted ! the
exp'osive ascent of IBB over the course of the past !ear%
To p'ace the performance of the pacers in context, the hi$h f'!ers were compared a$ainst
a renowned enchmar& of the stoc& mar&et% The touchstone too& the form of .P4 whose
mission is to trac& the f'a$ship index of the stoc& mar&et% As thin$s turned out, the trio of
winnin$ funds name'!, IBB, PJP and XBI trounced the esta 'ished enchmar& of the
ourse ! a heft! mar$in%
Further Information
In si6in$ up an asset for investment in an! domain, the prospective pa!off has to e
wei$hed a$ainst the ris& entai'ed% The crucia' factors to consider are surve!ed in thesection on Financial Risk at "int#it oreH httpH www%mint&it%com ris&%
A primer tit'ed Kow to Beat the Investment FundsL /"int&it ore, *+ - 0 $ives the
'owdown on $rowth and ris& for exchan$e traded funds% "oreover the surve! app'ies the
$enera' $uide'ines to a case stud! of index funds for the emer$in$ mar&ets of Bra6i',
hina, India and Russia%
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The data avai'a 'e on exchan$e traded funds is often patch!, fau't! and or mis'eadin$%
These stum 'in$ 'oc&s, a'on$ with a 8uiver of defensive moves for the war! investor, are
examined in an artic'e on rudd! Information on (xchan$e Traded FundsL /"int&it ore,
*+ -a0%
#eferences
#im, .% ildcats !f Finance % "int#it%comH "int#it Press, *+ %
httpH www%mint&it%com >i'dcats7of7Finance tapped *+ - 3 *%
"int&it ore% rudd! Information on (xchan$e Traded FundsL%
httpH www%mint&it%com crudd!7information7exchan$e7traded7funds tapped *+ -a 3 *%
"int&it ore% Kow to Beat the Investment FundsL% httpH www%mint&it%com eat7
investment7funds tapped *+ - 3 *%
"ornin$star% (TF PerformanceL% httpH news%mornin$star%com etf Mists (TFReturns%htm'
tapped *+ - 3 3%
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http://www.mintkit.com/Wildcats-of-Financehttp://www.mintkit.com/cruddy-information-exchange-traded-fundshttp://www.mintkit.com/beat-investment-fundshttp://www.mintkit.com/beat-investment-fundshttp://news.morningstar.com/etf/Lists/ETFReturns.htmlhttp://www.mintkit.com/Wildcats-of-Financehttp://www.mintkit.com/cruddy-information-exchange-traded-fundshttp://www.mintkit.com/beat-investment-fundshttp://www.mintkit.com/beat-investment-fundshttp://news.morningstar.com/etf/Lists/ETFReturns.html