Direxion Files Two Triple-Leveraged Pharmaceutical ETFs

July 1, 2015 4:40pm NYSE:XLV

direxion_logoPharmaceuticals – one of the hottest sectors of 2014 – has continued with its winning momentum this year as well on the back of several mergers and acquisitions. Moreover, impressive earnings in Q1 have helped to keep up the trend.


The bullish sentiment in the space is attracting issuers to come up with funds focusing on the space. Direxion, the second largest leader in the leverage and inverse ETF world, plans to launch a pair of ETFs targeting this growing sector by employing triple leverage.

Direxion Funds in Focus

The duo looks to give investors daily resetting exposure to Dynamic Pharmaceutical Intellidex Index with Direxion Daily Pharmaceutical Bull 2x Shares using 200% exposure and Direxion Daily Pharmaceutical Bear 2x Shares delivering a -200% return.

The index provides exposure to U.S. pharmaceutical companies principally engaged in research, development, manufacture, sale or distribution of pharmaceuticals and drugs of all types. The index might also include companies that facilitate the testing or regulatory approval of drugs.

The index uses a proprietary model that ranks the stocks for capital appreciation potential. The index includes 40% large cap and 60% small cap stocks selected from 2,000 largest companies listed on the NYSE MKT and NASDAQ. Sector-wise, the fund is expected to provide exposure to financial, technology, consumer discretionary, health care and producer durable industries.

The fund might use financial instruments such as swap agreements; futures contracts; equity caps, floors and collars; forward contracts; reverse repurchase agreements and ETFs to provide leveraged and unleveraged exposure to the Index.

How Do They Fit in a Portfolio?

Due to the daily resetting nature of these leveraged ETFs, the duo involves a high degree of risk when compared to traditional funds in the space and are hence not suitable for long-term bets. Rather, these should be utilized by high-risk tolerant traders seeking to play for the short term.

This is especially true given that investing through derivative instruments increases volatility. Further, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures.

Mergers and acquisitions have continued to play a major role in the Pharmaceuticals sector this year as well. Moreover, the health care sector was one of the top contributors to both S&P 500 earnings and revenue growth during Q1. Moreover, restructuring activities are also gaining momentum as large pharma companies are looking to cut costs and streamline their operations.

However, lofty valuations continue to remain a concern in this sector and could negatively affect the performance of the sector.

Competition

Health Care Select Sector SPDR (XLV) and Health Care ETF (VHT) are the most popular funds in the broad health care space. Apart from this, some of the popular funds in the plain vanilla pharma space include Dynamic Pharmaceuticals (PJP) and iShares U.S. Pharmaceuticals ETF (IHE).

The proposed leveraged ETFs are the first products targeting purely the pharma sector and as such are expected to have a first mover advantage. However, there are some leveraged health care products which could give competition to the proposed products if launched.

Daily Healthcare Bull 3X Shares (CURE), which offers three times (3x or 300%) exposure to the daily performance of the Health Care Select Sector Index, is one such product. The fund manages an asset of $425.5 million and charges 95 basis points as fees. Ultra Health Care (RXL) is another such fund in the broad health care space.

This article is brought to you courtesy of Zacks.


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