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Monday 8 July 2013

Half-Time Equity Sector ETFs Perspective

Figure 1. Equity Sector ETFs - Overlap Performance (Part 1: 60/70 ETFs)

This research forms the basis of FPM’s top-down  cross asset allocation for 2H13 into 2015. We examine expectations for the global equity sector based on rear-view mirror look at ETFs performance. The window period of scrutiny is June 2007 to now, as at end-May 2013. This period is arguably poignant since it heralded the financial crisis, peaking in Sep 2008, and now with global equity indexes testing pre-crisis record levels. Presented below are life-history charts of the S+P 500 and its proxy ETF SPDR S+P 500 (SPY). We think this is “half-time” based on the prognosis of the approximately 10-year cycle that we entered, according to the Rogoff and Reinhart assessment of the state of global economics.

Chart 1. S+P 500 and its proxy ETF the SPDR S&P 500 (SPY) - Source:Yahoo.com and FPM

Also, the period from June to May tends to excludes “window-dressing” price-action. For comparison sake, the analysis window is also dictated by latest ETF inception, for the “Overlap Performance” analysis. Master limited partnerships or MLP sector ETFs as represented by “Alerian MLP ETF (AMLP)” launched in Sep 2010, hence why the overlap performance period starts Sep 2010 to end-May 2013. This is 3 months short of 3-years’ analysis period. The second analysis is “Inception Performance” of the sector-proxy ETFs. For the full half-year ETF sector analysis to end June 2013, or for any other customized portfolio and study-period please contact FPM.

We’ve calculated 12 statistical risk-return metrics for 70 ETFs, each serving as benchmark for equities, with a bias on US markets. Using Noah’s Ark amalgam of the best of breeds, we selected the two largest capitalized ETF proxies for 35 equity sectors, as classified by Etfdb.com. We’ve added qualitative analysis to the quant metrics in terms of geopolitical considerations, among other issues such as globalization and climate change. So we discuss less about idiosyncratic company fundamentals and risks, and more about the big picture ideas. We also bias our analysis towards Sociably Responsible Investment themes. Our ideological corporate reputation matters even if we fall short of that in practical matters.

At this market juncture, equities are in vogue and promoted as the great rotation away from credit investments. This research forms the basis of FPM’s top-down equity asset allocation for 2H13 into 2015

FPM found Health+Biotech sector equity performance of near 100% total returns, on compounded basis for the study period based on adjusted closing prices of select ETFs.
Refer to Fig.1, highlighted by green in first column against “iShares Nasdaq Biotechnology Index Fund (IBB)”. Note that these returns reflects dividend and splits adjusted Yahoo.com historical prices performance at month-end. We have not examined the underlying constituents of the discussed ETFs to confine this note to top-down sectoral research.

From our “Mirror View Thesis” of this sector analysis, FPM believes that an inverse image is in view for the next half of the Health & Biotech industry fortunes. Based on tougher industry regulation from restricting pernicious industry practices we expect this sector to experience slower growth. We are not shy of supporting controversy but there are healthy trends which check the growth of traditional pharmaceutical companies. Such as the growth of ‘alternative therapies’ of homeopath and naturopath sciences.  As well as the advent of ‘genome mapping’ of individuals with DNA-biotech and geneology. These evolutions in the human health and well being industries generally present a challenge to the existing establishment of big pharmaceutical. For instance a drug for epilepsy was directly found to cause babies of the drug-taking mothers to be born with severe disabilities of retardation. See UK Guardian national newspaper revelation. The crux of the story was that because pregnant women cannot be used as guinea-pigs for epileptic drug testing, this drug was allowed to pass FDA drug approval and be sold internationally to pregnant mothers! So now we know who were deceived to be guinea pigs and with tragic disastrous human consequences, perpetrated by those involved with the Epilim drug coming to market.  What obscure legislative loop-hole that flagrantly allowed the next generation of patients to be born dependent on health and biotech innovations. No small wonder that the naturopath and homeopath alternatives medicines are being pursued. The human tragedy from corruption-riddled corporate activities are generally being checked but it is a David and Goliath battle. Life-changing technology of viral memes in information from the internet permeates via the whistle-blowing industry. The mega pharmaceutical company bubble that will burst for this solitary reputation indiscretion, but by no small means the only example of “willful blindness”, is Sanofi-Aventis. We don’t feel we need to look at the underlying constituents of ETFs or other funds to know that this large market-capitalized pharmaco is in major savings portfolios.

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