Having Fun With Pharma ETFs

With markets jittery about tariffs and trade wars, investors considering sector-level ideas may want to lean toward groups that generate significant portions of their revenue on a domestic basis. The healthcare sector, the third-largest sector weight in the S&P 500, derives over 80 percent of its revenue within U.S. borders.

Specifically, biotechnology and pharmaceuticals stocks are showing some immunity to trade war speculation. Over the past month, the Dynamic Pharmaceutical Intellidex Index is higher by more than 5 percent.

What Happened

The Direxion Daily Pharmaceutical & Medical Bull 3X Shares (NYSE: PILL), the only triple-leveraged pharmaceuticals exchange traded fund (ETF), attempts to deliver triple the daily returns of the Dynamic Pharmaceutical Intellidex Index.

“Beyond the trend of positive earnings per share surprises from the likes of Pfizer, Eli Lilly and Regeneron Pharmaceuticals, there are a host of other factors that make big pharma the clear favorite going into Q2 earnings season,” said Direxion in a recent note. “Not the least of which was the FDA’s recent approval of an experimental treatment for alzheimer’s disease from Biogen that boosted the company’s stock by nearly 20 percent in a matter of hours.”

PILL's underlying index features exposure to the aforementioned stocks and more. The index devotes over 55 percent of its weight to pharmaceuticals names and 40 percent to biotechnology stocks.

Why It's Important

A broader alternative to PILL is the Direxion Daily Healthcare Bull 3X Shares (NYSE: CURE), the dominant name among diversified, leveraged healthcare ETFs. CURE seeks to deliver triple the daily returns of the Health Care Select Sector Index (IXVTR).

Aggressive traders looking to trade earnings news may want to consider CURE and do so with immediate effect. From July 27 through July 31, three of the top five components in CURE's underlying index, a trio combining for almost 16 percent of the benchmark's weight, report earnings.

Pharmaceuticals and biotechnology stocks combine for about half of that index's weight.

What's Next

“What has truly enhanced the growth in biotech is the long sequence of M&A and IPO announcements that have taken place in the cash-flush industry,” said Direxion. “In late 2017 to early 2018, three acquisitions from Sanofi SA, Celgene Corporation and Gilead Sciences alone had the pharma giants moving $30 billion in capital. And Q1 2018 racked up about $47 billion in M&A. On top of that, here have already been 33 IPOs over the first seven months of the year alone.”

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