Nothing Succeeds Like Excess

3102Nothing Succeeds Like Excess

Anthony J. Ogorek | ED.D., CFP®

Investors like nothing better than a low risk, high return investment opportunity. Something that has a real track record, and the longer the better. It is at moments like this that their greed gland becomes engorged with visions of EM. Emerging Markets? We’re talking Easy Money here.

 

Behold the chart below, the depiction of a most enviable track record – the 15 year performance of the Blackrock Health Science ETF (orange line) versus the relatively slack S&P 500 (blue line). Over this 15 year snapshot the health care fund has doubled the performance of the S&P 500. Quite an accomplishment.

15 year performance of the Blackrock Health Science ETF (orange line) versus the relatively slack S&P 500 (blue line)

Isn’t this the holy grail that we all pine for? More importantly, can we still get into this superlative performer? Perhaps we are asking the wrong question. Do we even WANT to get into this ETF?  Some will say that you can’t lose with a track record like this. Track records aside, successful investing is ALWAYS about price.

 

Now take a look at the chart below that depicts flows, in billions of dollars, into healthcare ETFs since 2010. The orange line (the 90th percentile) is of particular interest to us. Note that anytime money flows spike above the orange line they inevitably take a fall, sometimes a rather dramatic fall.

 

Flows, in billions of dollars, into healthcare ETFs since 2010

Notice where we are right now. Flows are practically off the chart, at all-time highs. History would seem to suggest that the higher the flows, the larger the subsequent falls. Money going out the door typically is the result of a falling share price. Conversely big flows into a sector will naturally boost the price of stocks in that sector.

 

As we mentioned in the title of this post, nothing succeeds like excess – until it doesn’t. Although demographics are providing healthcare stocks with a tailwind, you have to question whether the flows into this area are the result of it being one of just a handful of outperforming sectors right now. Even investments with stellar long-term track records can be money losing propositions, if their price is divorced from economic reality.

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