The Revenge of the Stock Pickers

Figures & data

Table 1. Five “Outsiders” in XLV: Stocks in the Bottom 10% of ETF Betas

Ticker	Name	Beta	Description
DVA	DaVita	0.57	Provides kidney dialysis services. Almost 90% of patients are covered by government health plans.
PDCO	Patterson Companies	0.59	Distributes dental products, veterinary supplies for companion pets, and rehabilitation supplies.
BAX	Baxter International	0.66	Develops, manufactures, and markets products related to a wide range of acute medical conditions.
ABC	AmerisourceBergen	0.67	Distributes branded and generic pharmaceuticals, home health care supplies and equipment, services, etc.
LH	LabCorp	0.68	Offers clinical laboratory tests used for testing for, diagnosing, monitoring, and treating diseases.

Notes: Betas are calculated relative to XLV using an exponentially weighted regression based on daily data from 31 December 1998 to 25 September 2015 (half-life of one quarter). The end date of 25 September 2015 reflects the information any investor would have had at that time.

Source: Based on data from Bloomberg Index Services Ltd.

Figure 1. Average Cross-Constituent Correlations: Full Sample vs. High-ETF-Volume Days, 4 January 2010–29 December 2017

Notes: Data are as of 29 December 2017 and include daily data for the SPDR S&P 500 ETF (SPY), nine US sector ETFs, and the iShares Core S&P Small-Cap ETF (IJR). The ETF symbols are defined in Exhibit 1.

Sources: Standard & Poor’s (S&P); IDC. Data analysis by T. Rowe Price.

Exhibit 1. ETF Symbols and Names

ETF Symbol	ETF Name
SPY	SPDR S&P 500 ETF
XLY	Consumer Discretionary Select Sector SPDR ETF
XLP	Consumer Staples Select Sector SPDR ETF
XLE	Energy Select Sector SPDR ETF
XLF	Financial Select Sector SPDR ETF
XLV	Health Care Select Sector SPDR ETF
XLI	Industrial Select Sector SPDR ETF
XLB	Materials Select Sector SPDR ETF
XLK	Technology Select Sector SPDR ETF
XLU	Utilities Select Sector SPDR ETF
IJR	iShares Core S&P Small-Cap ETF

Figure 2. Average Alpha after ETF Volume Spike, 4 January 2010–29 December 2017

Notes: Data are as of 29 December 2017. Transaction costs are estimated at 10 bps, or 17 bps considering leverage, on average. Borrowing costs are based on LIBOR and depend on how long the position is held. They cumulate to about 10 bps, on average, after 40 days. Hence, a rough estimate of total costs (transaction and borrowing) for 40 days would be 27 bps.

Sources: S&P; IDC. Data analysis by T. Rowe Price.

Figure 3. Average Alphas after ETF Volume Spike by ETF, 4 January 2010–29 December 2017

Notes: Data are as of 29 December 2017. Transaction costs are estimated at 10 bps, or 17 bps considering leverage, on average. Borrowing costs are based on LIBOR + 50 bps and depend on how long the position is held. They cumulate to about 10 bps, on average, after 40 days. Hence, a rough estimate of total costs (transaction and borrowing) for 40 days would be 27 bps. The Wilcoxon signed-rank test (see the online supplemental material, available at www.tandfonline.com/doi/suppl/10.1080/0015198X.2019.1572358, for details) indicates significance levels of 0.05* and 0.01**. Some returns are positive on Day 0 because they are measured relative to the ETF.

Sources: S&P; IDC; T. Rowe Price.