The adviser:

David Kudla, founder and chief executive officer at Mainstay Capital Management LLC in Grand Blanc, Mich.

The portfolio change:

In October, Mainstay reduced its position in the Catalyst Hedged Futures Strategy Fund, which seeks to protect investors in all markets with returns that aren’t correlated to stock markets, and purchased iShares Nasdaq Biotechnology ETF, which buys shares of biotechnology and pharmaceutical stocks listed on the Nasdaq Stock Market. The iShares ETF makes up 5% to 12% of the stock allocation of portfolios, depending on the client.

The reason:

Biotechnology stocks had been beaten down even though the sector’s fundamentals were good, Mr. Kudla says.

The sector took a sharp dive in late September after Democratic presidential candidate Hillary Clinton said in a tweet that she would propose a plan to counteract “price gouging” by drug makers. In addition, congressional Democrats, federal prosecutors and investors have raised questions about drug pricing and business practices by Valeant Pharmaceuticals International Inc.

The biotech sector is very active in merger-and-acquisition activity and has stellar earnings growth, Mr. Kudla says. But its shares recently traded at a forward price/earnings ratio less than that of a broader market measure, he says.

“It was a high-growth area selling at a discount to the S&P 500,” Mr. Kudla says. “We buy on headline risk, knowing that fundamentals are still good for the sector and that it will eventually rally, probably just with earnings reports, and that’s what we’re seeing now.”


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