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TMFHelical (99.10)

Eat my shorts.

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October 16, 2007 – Comments (0)

If you look at my port you'll notice I don't have a lot of underperform picks.  Trying to stay industry specific, I'm not chasing sectors that stink to gain favor with the lords of CAPS.  I have made some underperform picks based on valuation, but with only mixed results.  This is tough to do, but very important to CAPS as a rating service IMO.

But....there is one 'category' that I will be perennially short on - and that is the Healthshares series of ETFs.  This hasn't played well for me as all 6 active underperform picks are in the red, and only the four I've closed (and reupped) are in the green - a net losing position on both score and accuracy so far. [Note: I will close and reup these for accuracy bennies, but only 3 times a selection - of course that's not working out so far].

Why be so negative on these funds - a couple of reasons.  But first I would say that I like most of the companies in these funds.  I would tend toward bullishness on almost every holding in HHD (and should pick a few more), my worst selection to date.  OK, so first, I despise ETFs that invest in such narrow market segments, and I've seen only a few that attempt to carve up the market into thinner slices than Healthshares. Do we really need biotech split into Cardiovascular, Neuroscience, Oncology, etc.  If you invest in a fund for diversity, you won't find it here.

Second, these funds are designed for failure.  They are equal weighted and rebalance quarterly. Now I like equal weighting in broad market indexes.  I'd rather invest in RSP than SPY.  But that is because equal weighting the S&P 500 puts money into out-of-favor market segments, and pulls back on the highflyers.  This works when you invest in many segments, but not when you invest in only one - as a Healthshares index does.  Many biotechs fail.  For every big winner there are often a dozen failures (especially in oncology and cardiovascular).  The healthsares ETF design will never provide you the benefit of letting a winner run, crucial to biotech investing (especially pharma biotech).  Each quarter it will take those gains and shuffle them to the laggards and losers.

So, don't but these funds (don't eat my shorts?).  And I hope that anyone who looks to CAPS as part of consideration on buying any of these funds sees my underperform calls and thinks twice about them.

As for the underperformance to date - it will come around.

Now I need to look closer at the holdings of these funds to find a few select good picks to bolster my CAPS port (starting with diagnostics - but that will be another blog). 

Zz

P.S. - These funds are pretty illiquid and have small market caps, they probably shouldn't even be CAPS eligible. But I'm pleased they are so I can call them out as dogs.

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